By Sandra Sugawara
Washington Post Foreign Service
Wednesday, April 29, 1998; Page A28

TOKYO, April 28—The Japanese government said today that unemployment reached a record high of 3.9 percent in March, raising fears that, even after announcing its largest-ever fiscal stimulus package last week, Japan may be headed for more severe economic pain.

"This is very bad, much worse than expected," said Russell Jones, a Tokyo-based economist with the Lehman Brothers Inc. investment bank. Noting that the unemployment rate was 3.6 percent in February, Jones said: "This kind of rise in unemployment on a month-to-month basis is truly extraordinary for Japan, where the unemployment rates tend to move in very small steps."

Andrew Shipley, a Tokyo-based economist with Schroders PLC, a British merchant banking group, has predicted that unemployment will rise to 4.4 percent this fiscal year, which ends March 31, 1999, and 5.1 percent next fiscal year. "The economy is no longer generating jobs," he said.

Economists warn that rising unemployment here could increase consumer pessimism. That could lessen the impact of planned income tax cuts, which the government hopes will encourage consumers to spend money and thus give the economy a needed jolt. Prime Minister Ryutaro Hashimoto has been under increasing criticism for his inability to turn the economy around.

The Mainichi Shimbun, a daily newspaper, published an opinion poll today in which 50 percent of those surveyed did not support Hashimoto. The newspaper said that the findings put the prime minister in a "crisis zone," and it quoted Hashimoto adviser Koichi Kato, secretary general of the ruling Liberal Democratic Party, as saying he is worried. "The poor economy is hitting support for the administration hard," said Kato. "It is an ill wind ahead of the upper house elections" for parliament, scheduled for July.

The Nikkei stock index lost 254.52 points, or 1.63 percent, today, closing at 15,395.43, its lowest since Jan. 14. The Tokyo market, like most of the stock markets across Asia, opened sharply lower, startled by the sharp sell-off on Wall Street and markets around the world on Monday. But many Asian stock markets and currencies recovered later in the day.

In Tokyo, the market recovered somewhat after U.S. Secretary of State Madeleine K. Albright, who is visiting Japan as part of a week-long Asia trip, called Japan's economic stimulus package "a bold and important step forward." But it plummeted later in the day on rumors that a major construction company was about to go bankrupt. In addition, the surge in unemployment, along with disappointment among foreign investors over the failure of the Hashimoto government to propose structural economic changes or permanent tax reforms, discouraged investors from buying, traders said.

Economists say Hashimoto's stimulus package, which will begin injecting billions of dollars of public works projects into the economy in July, should help stem the economic slide later this year. But the impact on unemployment may not be felt for another three to six months after that, said Jones, who predicted that unemployment will top 4 percent.

Japan is not accustomed to such levels of unemployment. Its economic system -- under which banks are expected to provide financial lifelines to their major customers, who in turn are expected to support smaller firms -- is designed to protect jobs. But Japan's shaky banks are straining under the weight of bad loans, and large companies with dwindling profits can no longer afford to operate the old way, economists say.

Labor unions also joined the chorus of foreign officials and Japanese executives voicing concern about the economy and calling for swift government action.

Economists also warn that Japan's woes are bad news for the rest of Asia, whose economies are worsening, despite efforts to stabilize their currencies. South Korea recently reported an unemployment rate of 6.5 percent for March, the highest figure in 16 years. An official in Jakarta said today that there are 9 million unemployed in Indonesia, which has a total work force of 90 million. The official said he expects that figure to climb to 13 million by the end of the year.