*Japanese govt sees 3.3 pct contraction in year to March 2010
*Bond sales jump to record high, auction programme revised
*Another stimulus package mooted, market sees more bonds
*JGB futures retreat; fears of further issuance cited
By Yuzo Saeki
TOKYO, April 27 (Reuters) - Japan's government slashed on Monday its economic forecasts, saying gross domestic product would shrink 3.3 percent over the next year, and a senior ruling party official said further stimulus would be needed.
The cabinet formally approved a record 15.4 trillion yen ($159 billion) stimulus plan, largely funded by new bonds -- with market players warning sliding tax revenue and more stimulus spending would mean even more bond issuance.
"We need measures to support the economy for the long term," Hiroyuki Sonoda, the acting policy council chairman for the ruling Liberal Democratic Party told a seminar in Tokyo.
The government plans to sell 16.9 trillion yen in additional bonds, raising total issuance 13 percent to 149 trillion yen, prompting a greatly increased bond auction programme.
The increase means the sale of new bonds almost matches tax revenue in the core government budget, official figures show.
Government officials warned that even their new forecasts came with substantial downside risks, reinforcing expectations for another stimulus package and more bonds.
"It will be a closely watched event toward the year-end," said Tatsuo Ichikawa, a fixed-income strategist at RBS Securities.
"Although it is not a major factor in the market right now, there's a vague sense of anxiety about additional JGB issuance."
June 10-year JGB futures fell 0.55 point to 136.60, pulling back from a three-week high last week as traders cited a rise in short positions on fears of more issuance.
The global financial crisis has pummeled demand for Japan's cars, technology and other exports, leaving it facing its worst recession since World War Two.
March trade figures showed exports may be stabilising, but at levels only around half that of a year earlier as the IMF predicts the world economy will suffer its deepest contraction in half a century.
Private sector economists and the central bank were already forecasting a sharp contraction in the economy this year, and the new forecasts brought the government outlook more into line.
FACTORY PAIN
Driving the contraction are sliding industrial production and exports. The government now sees industrial production falling 23.4 percent in the year to next March, much deeper than its previous forecast for a 4.8 percent drop.
It said exports may tumble 27.6 percent, down from its previous forecast issued in January for a 3.2 percent fall.
The outlook takes into account the record stimulus plan unveiled this month, which the government hopes will boost economic activity by 1.9 percentage points, but also with a warning that there were risks of a further downgrade in outlook. "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."
Boding ill for Prime Minister Taro Aso just months away from an election, the government forecast unemployment to rise to a seven-year high of 5.2 percent, as a sharp drop in production in light of tumbling exports dealt a severe blow to manufacturing jobs.
The government also forecast a deeper return to deflation this year, with prices seen dropping 1.3 percent, further than a previous forecast for a 0.4 percent fall.
Japan's overall consumer prices, including volatile fresh food prices, fell 0.1 percent in February from a year earlier, their first annual fall since September 2007. 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 first quarter figures due on May 20 may show an annualised contraction of about 14 percent -- the deepest since comparable data started in 1955.
The Bank of Japan is to release its half-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. ($1=97.15 Yen) (Writing by Rodney Joyce; Editing by Hugh Lawson)