By Yuzo Saeki
TOKYO, Dec 11 (Reuters) - Japan's economy is likely to contract at a much faster pace in the fourth quarter, as the global financial crisis hits exports and production, a Reuters poll showed on Thursday.
Economists in the monthly poll forecast that a recovery in the world's second-largest economy is unlikely until the second half of 2009, as they widened their projections for it to shrink this fiscal year and in the next which begins April 1.
In an additional question for this month's poll, economists said they saw a 40 percent chance of the Bank of Japan returning to a zero interest rate policy or quantitative easing.
The Japanese economy is expected to shrink 0.7 percent in October-December, according to the median forecast of 20 economists polled from Dec. 8-10, much worse than the 0.3 percent contraction forecast in the November poll.
As the worst financial crisis in decades reverberates across the world, export-oriented Japanese companies are curtailing production at an unprecedented pace.
"What was most shocking in recent weeks was the industrial production data which indicated that output would mark its sharpest-ever quarterly fall in October-December," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.
"It will likely affect consumption via job cuts and breaking this vicious cycle will not be easy."
Japan's industrial output fell by a bigger-than-expected 3.1 percent in October, with a record 8.6 percent fall seen for the fourth quarter. [ID:nT133784]
The median forecast for gross domestic product this fiscal year was sharply downgraded to a 0.9 percent contraction from minus 0.5 percent seen in November. The forecast for the next fiscal year is now a 0.7 percent contraction, more than double the 0.3 percent in last month's poll.
"Japan's recession is likely to continue through mid-2009," said Tomoko Fujii, an economist at Bank of America in Tokyo.
The poll showed the first quarter of positive GDP, at a very weak 0.2 percent, is forecast for October-December 2009 compared with July-September previously.
Fujii said sharply slowing overseas demand, tight domestic financial conditions and corporate restructuring will weigh on the economy despite economic stimulus packages from the government and monetary policy support from the central bank.
She added that a return to Japan's potential growth rate of 1.5 percent a year would only be likely from the beginning of 2010.
SPECULATION OF ZERO INTEREST RATE POLICY
Japanese companies have seen credit markets dry up as the corporate bond market becomes more wary of defaults. [ID:nT127616]
The BOJ decided at an extraordinary meeting this month to expand lending by about 3 trillion yen to help companies tide over a year-end credit squeeze and to accept lower-rated corporate bonds as collateral for loans. [ID:nT255877]
But some expect further action from the central bank will be needed, with median forecasts from 13 economists putting the chance of the BOJ pursuing a zero interest rate policy or quantitative easing in the next several months at 40 percent.
Other potential measures were also cited with Kyohei Morita, chief economist at Barclays Capital, saying the BOJ is likely to seriously consider increasing outright purchases of long-term Japanese government bonds around mid-2009.
The BOJ ended a six-year period of zero interest rate policy in July 2006. During that period, a unique policy of quantitative easing -- flooding the banking system with excess cash -- was implemented from March 2001 to March 2006.
But BOJ Governor Masaaki Shirakawa has also reiterated that cutting rates further could hamper the smooth functioning of the money market. The BOJ policy board's next regular meeting is slated for Dec. 18-19.
Swap contracts on the overnight call rate showed on Thursday
that investors see a roughly 10 percent chance of the Bank of
Japan lowering interest rates by 25 basis points next week.
Japan is seen flirting with deflation in the next fiscal year with prices shrinking by 0.1 percent. Inflation is seen a little lower than previously expected in the current fiscal year at 1.4 percent
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(Polling by Bangalore Polling Unit; Reporting by Yuzo Saeki; Editing by Toby Chopra)