TOKYO, April 27 (Reuters) - The government cut its forecast for Japan's economy to shrink 3.3 percent in the year to next March instead of its previous estimate of zero growth on Monday as the world's No.2 economy remains in the grip of the worst recession since World War Two.
The government also sharply lowered forecasts for industrial output and exports, which have been the main drag to the economy.
Tokyo now sees industrial production falling 23.4 percent in the current fiscal year against the previous forecast of a 4.8 percent drop, and exports slipping 27.6 percent compared with a 3.2 percent fall expected earlier.
The outlook takes into account a record 15.4 trillion yen ($158.5 billion) stimulus the government unveiled in early April which it hopes will help raise economic activity by 1.9 percentage points. Finance Minister Kaoru Yosano has instructed Cabinet Office, the government's main economic research and policy agency, to review its economic forecast released in January, citing a rapid deterioration in economic conditions.
The forecast is used as the basis for various policy decisions, including compiling budget plans.
The Cabinet Office said downside risks remain. "High uncertainties remain over the outlook for the stabilisation of the global financial system as well as the economy," the Cabinet Office said in a report.
"Developments in job conditions need to be carefully watched," it said.
The new forecast sees the unemployment rate rising to 5.2 percent against the earlier estimate of 4.7 percent, as a sharp drop in production in light of tumbling exports dealt a severe blow to manufacturing jobs. The government also cut forecasts for corporate capital investment for fiscal 2009/10 to a fall of 14.1 percent from the earlier forecast of 4.2 percent.
Although a rising jobless rate bodes ill for consumption, Cabinet Office lowered forecasts for private consumption only slightly to a 0.3 percent rise from the earlier estimate of a 0.4 percent rise, counting on a positive impact from the stimulus steps.
The Cabinet Office estimates the stimulus package, which adds to previous economic steps amounting to 12 trillion yen since the breakout of the economic crisis, will push up private spending by 0.7 percentage point.
But as consumers tighten their purse strings and corporate demand falls, fears are growing that deflation is setting in again.
The overall consumer price index (CPI) is expected to fall 1.3 percent in the fiscal 2009, a bigger fall than a 0.4 percent decline forecast in January.
Japan's overall CPI fell 0.1 percent in February from a year earlier, marking the first year-on-year fall since September 2007. The March figures are due out on Friday.
The new forecast also included a revised real GDP estimate of a 3.1 percent contraction in the fiscal year ended on March 31, down sharply from the earlier estimate of a 0.8 contraction.
The new forecast is based on an assumption that the January-March quarter would show an annualised contraction of around 14 percent. If realised, it would be the worst contraction since comparable data started in 1955. Preliminary figures for first-quarter GDP are due out on May 20.
The Bank of Japan is also to release its twice-yearly outlook report for the economy and prices on Thursday. The central bank currently forecasts two years of falling prices.
The International Monetary Fund on Wednesday doubled its forecast contraction for Japan to a slide of 6.2 percent in calendar 2009 but this will be heavily influenced by a sharp contraction expected for the first quarter, which the fiscal year forecasts do not include. (Reporting by Yuzo Saeki; Editing by Michael Watson)