* Q4 GDP revised to +0.9 pct qtr/qtr vs preliminary +1.1 pct
* Downward revision partly due to slow capex growth
* Inventories could point to higher output in future
* Deputy finmin: wants to attend BOJ meeting next week (Recasts)
By Stanley White and Hideyuki Sano
TOKYO, March 11 (Reuters) - Japan's economy grew less than initially estimated in the fourth quarter and a broad gauge of price trends posted the biggest negative reading on record, adding to pressure on the Bank of Japan to ease monetary policy further next week.
The BOJ is leaning towards doing exactly that at its policy meeting on March 16-17, sources familiar with the central bank's thinking said, but there is disagreement among its seven board members on how to justify such a move.
Deputy finance minister Yoshihiko Noda said on Thursday that he wanted to attend the BOJ's meeting next week and that he believes the BOJ has a sense of crisis -- comments most likely intended to push the central bank further towards easing policy.
Some economists argue that more easing is warranted as the downward revision to gross domestic product came because domestic demand wasn't as strong as originally estimated, which offers a glimpse of the damaging impact deflation has on curbing Japan's growth.
Prime Minister Yukio Hatoyama's cabinet is calling for the BOJ to do more to support the economy as the country's large debt burden limits the government's ability to use fiscal policy to spur growth. Hatoyama is also trying to show voters he is proactive as he struggles to turn around slumping approval ratings before an upper house election expected in July.
"I would normally expect consumption and domestic demand to be stronger, but once you exclude government subsidies you're left with deflation," said Takahide Kiuchi, chief economist at Nomura Securities.
"There's no immediate solution, but additional easing by the central bank would at least weaken the yen, and that could help ease deflation."
The economy grew 0.9 percent in the October-December quarter, slower than the preliminary estimate of 1.1 percent and a median market forecast of 1.0 percent, as capital spending rose less than initially reported and as private inventories subtracted from growth, data by the Cabinet Office showed on Thursday.
On an annualised basis, Japan's economy expanded 3.8 percent, against the initial reading of 4.6 percent and a median market forecast of 4.1 percent.
Financial markets shrugged off the data, and the Nikkei average rose to a seven-week high as a weak yen boosted exporters' shares. The rise in stocks pushed down bond prices.
Japan's expansion in the fourth quarter was faster than the 0.1 percent growth in the European Union but slower than a 1.4 percent expansion in the United States in the same period.
The deflator, a statistical device used to adjust data in nominal GDP to reflect overall price levels, stood at minus 2.8 percent, the biggest negative reading on record, in a sign deflation shows no signs of abating. It compared with a preliminary reading of minus 3.0 percent.
Deflation is damaging to economic growth because companies and consumers could delay spending as they expect goods to become ever cheaper. It can also crimp borrowing as real interest rates are higher than nominal rates.
Finance Minister Naoto Kan has also reiterated that he hopes Japan will escape deflation by the end of this year but economists see that as impossible with the economy still suffering a big overhang of excess capacity.
Under the law governing the BOJ, government representatives have the right to attend central bank policy meetings to express their views but cannot vote on policy. They can request that the BOJ delay a monetary policy vote, but it is up to the BOJ board members to decide whether they will accept such requests.
The government, swayed by robust exports to China and a steady increase in industrial production, is likely to upgrade its economic assessment this month but will keep its warning that Japan remains in deflation, the Nikkei newspaper reported on Thursday.
Economists also say exports to Asia will continue to support growth this year, but the pace may slow on cuts in public works and as the impact of government subsidies on energy-efficient goods starts to wane.
"The revised GDP data doesn't change the prospects of the economy slowing down towards the summer, chiefly because the boost from government stimulus on private consumption is likely to peter out," said Seiji Shiraishi, chief economist at HSBC Securities Japan.
"Although the government is reportedly set to upgrade its economic assessment, the Bank of Japan is entirely focused on price moves and probably on government pressure so it is expected to take further easing steps." (Editing by Hugh Lawson)