UPDATE 3-Japan capex slide signals sharper recession

(Adds Reuters poll)

By Hideyuki Sano

TOKYO, Dec 4 (Reuters) - Japan's economy probably contracted more than initially estimated in the third quarter, a corporate survey signalled on Thursday, and analysts warn the world's No.2 economy could stay in recession well into next year.

A Reuters poll showed economists now expect third-quarter gross domestic product shrank 0.2 percent, more than preliminary government data showing a fall of 0.1 percent.

Analysts also said Japan, which has relied on exports to make up for weak domestic consumption, looks set to go through an even bigger contraction in the fourth quarter as the financial crisis pushes the world into its sharpest slowdown in decades.

"With the decline in capital spending this big, it's likely that third-quarter gross domestic product will be revised down," said Kyohei Morita, chief economist at Barclays Capital.

"There's a growing chance that Japan's economy will remain in recession until the second quarter of next year."

Japanese companies cut spending on plant and equipment by 13 percent in July-September compared with the same quarter a year earlier, the Ministry of Finance survey showed.

Although the fall was exaggerated by changes in accounting rules on leasing, the data is closely watched as it is used in calculating revised July-September GDP, due out on Dec 9.

The economy contracted 0.9 percent in the second quarter, its sharpest quarterly fall in seven years, and the two quarters together tipped Japan into recession, going by a widely used definition of two straight quarters of contraction.

The ministry survey also showed Japanese companies' profits dropped 22.4 percent from a year ago, the sharpest such fall in six and a half years.

The real test for the economy, say economists, will be reflected in figures for October-December and the following quarter, when Japan will likely face the full impact of the sharp downturn in the world economy.

"Until July-September, the fall in profits was driven by rising costs. But exports and output are falling on a plunge in demand," said Hiroshi Watanabe, a senior economist at Daiwa Institute of Research.

Recent data showed Japanese companies are halting production at an unprecedented pace as demand plunged not just in the United States and Europe but also in emerging nations that had until recently weathered the global financial storm.

Industrial production is seen posting the sharpest fall ever in the fourth quarter as leading exporters such as Toyota Corp slash output in the face of a sharp fall in global demand.

Adding to the painful slide in exporters' profits, the yen has strengthened 13 percent against the dollar and 27 percent against the euro since the end of September.

Fears are growing that Japan's recession could last longer than ever before. The previous record was three quarters in a row, as in the last contraction seven years ago in the wake of the dot.com bust.

Some analysts speculate the Bank of Japan will cut interest rates again by the end of the current business year next March, after a trim to 0.30 percent from 0.50 percent in October, although derivative contracts are not pricing in a significant chance of that happening.

The BOJ said on Tuesday it would expand lending by about 3 trillion yen ($32 billion) to help tide companies over during a year-end credit squeeze, with Japanese credit spreads having started to creep up in the past few months. (Editing by Hugh Lawson)