Japan's economic distress deepened Friday as the government reported the highest unemployment rate on record and the yen weakened severely for the fourth day this week, touching yet another seven-year low against the dollar.

The combination of rising joblessness and falling currency intensified fears that the world's second-largest economy is not only mired in a recession but may be verging on a deflationary spiral, a cycle of declining prices, weakened demand and falling output that could ripple through the other troubled economies of Asia and hurt the U.S. economy.

"I think we are in the early stage of a deflationary spiral," said Haruo Shimada, an economics professor at Keio University.

The yen's slide reflected selling by traders who turned to the dollar for safety after Pakistan conducted five nuclear tests Thursday, raising fears of a new arms race with India and worsening instability in Asia.

The Japanese currency slipped further after the government said Friday that unemployment had hit a record 4.1 percent in April, up from 3.9 percent in March. It ended trading in New York Friday at 138.90 yen to the dollar compared with 138.70 Thursday. The yen has fallen 6 percent in value against the dollar since the end of 1997 and fallen more than 16 percent compared with the same time a year ago.

American officials have been deeply worried about the economic problems in Japan. Concern is also growing that Japanese government officials have few tools left to revive the economy. The Bank of Japan, the central bank, has been pursuing an easy monetary policy for years and its benchmark lending rate to banks is at half a percent, so there is little room for the bank to drop rates further to help fuel the economy.

"It's quite scary," said Andrew Shipley, an economist at Schroders Japan Ltd. Referring to the Bank of Japan, he said, "Japan's economy is sliding into recession without the BOJ able to cushion the blow."

Parliament finally passed long-awaited legislation Friday that will relax the fiscal austerity law and allow the government to spend more on the economy and cut taxes to spur growth.

Koji Omi, chief of the Economic Planning Agency and the nation's top economic policymaker, acknowledged Friday that the economic troubles are becoming increasingly severe, particularly in employment and production. The April unemployment data showed the jobless rates for males was 4.2 percent and only 55 jobs exist for for every 100 applicants, the worst in two decades.

Those statistics make Japan's unemployment rate nearly the same as that in the American economy, where joblessness historically has been far higher. But Japan's rate is calculated such that anyone who has worked for even one hour in the final week of the month is considered fully employed. Some economists say unemployment, if calculated by American methods, could be twice as high.