UPDATE 3-Japan Q4 capex slides; growth seen hit hard

(Adds Reuters poll)

By Yoko Nishikawa

TOKYO, March 5 (Reuters) - Japanese corporate capital
spending fell the most in five years, pointing to a sharp
downward revision in fourth-quarter growth and reinforcing
concerns the world's No.2 economy is slipping into recession.

The 7.7 percent slide in fourth-quarter capital spending from
a year earlier, almost four times the expected fall, comes as
markets increasingly price in a rate cut by the central bank,
although the Bank of Japan is not expected to move rates at its
March review this week.

Economists expect growth for for the fourth quarter to be
revised down to 0.6 percent, from a previously reported 0.9
percent, a Reuters poll of 21 economists showed, because of the
weak capital expenditure figure. [ID:nT248831]

And worse was likely to come in early 2008, said Taro Saito,
a senior economist at NLI Research Institute.

"Even though October-December GDP will likely be revised
down, we can say the economy was still firm then. But it has been
slowing down since the beginning of this year," he said.

Economists are forecasting a sharp slowdown in growth, and
possiblly a recession, in both the United States and Japan this
year in the wake of the U.S. subprime housing crisis.

Swap contracts on the overnight call rate are pricing in
roughly a 50 percent chance that the BOJ will cut rates by the
end of the year, a jump from around a 20 percent chance seen a
week ago. JPONIBOJ=TRDT

While the U.S. growth fears have hit the dollar, the yen has
hit a three-year high against the sliding U.S. currency this
week, partly fueled by investors unwinding investments carried by
cheap borrowing in yen. FXNEWS [FRX/]

"The only thing that has kept Japan going was a cheap yen and
the world boom. Now they are gone," Charles Dumas, head of the
world service at Lombard Street Research, told an investor
briefing in London on Tuesday.

"The yen is taking off, or rather yen carry is being taken
off. Probably Japan is in recession in the first half of this
year."

SERVICE SECTOR HIT

The sharp fall in capex was was the third straight quarter of
annual decline and the sharpest drop since a 12.2 percent fall
reported in the year to July-September 2002, Ministry of Finance
figures showed.

Worst hit were the IT and leasing sectors, as capital
spending among non-manufacturers fell 12 percent from a year
earlier, while manufacturers -- many of whom are major exporters
-- spent a little more. [ID:nT224947]

"Companies' drive to invest will likely continue to weaken in
the current January-March quarter in light of sluggish domestic
demand and worries over the outlook for the global economy," said
Takeshi Minami, chief economist at Norinchukin Research
Institute.

Financial markets have been more focused on the global market
jitters but the weak data hit machinery stocks.

Shares in construction equipment maker Komatsu Ltd (6301.T)
fell 1.5 percent as Tokyo's machinery shares subindex .INCHN.T
shed 0.9 percent.

"Companies' profits have been already in a downtrend since
the middle of last year, and today's data shows that companies'
capital spending is peaking following sluggish profits," said
Junko Nishioka, an economist at ABN Amro Securities.

SQUEEZED

While companies saw sales rise 2.3 percent, their recurring
profits fell 4.5 percent in a sign that rising crude oil and
other raw material costs were hurting their bottom line.

Revised GDP figures for the fourth quarter are due out next
Wednesday. The preliminary 0.9 percent growth figure -- an
annualised rate of 3.7 percent -- had been double the forecast
rate and was driven largely by strong capital spending and
exports.

But economists have already been pointing to fears of a U.S.
recession, weakening industrial output and consumer sentiment at
home, and shaky financial markets as factors to cloud Japan's
economic outlook.

The BOJ's policy board is widely expected to sit tight on
rates at Governor Toshihiko Fukui's last scheduled rate review
meeting on Thursday and Friday -- a meeting that has been
overshadowed by political bickering about his successor.

With two weeks to go until Fukui retires, the government and
opposition have still not agreed who should replace him.
[ID:nT55777]
(Editing by Rodney Joyce)