* Japan capex logs record fall, signals no change to dismal GDP * Company profits plummet, sales post record fall in Q4 * Hopes for China economy boost Japan share prices * Japan economy seen contracting until at least Q2
By Tetsushi Kajimoto
TOKYO, March 5 (Reuters) - Japanese firms slashed capital spending at their sharpest pace on record in the fourth quarter as the plunge in global demand hammered profits, but there were positive signs in a big fall in inventories.
Overall, the figures meant revised GDP data next week would likely show Japan's economy shrank 3.3 percent in the quarter, a Reuters poll found, the deepest contraction since 1974 but unchanged from an earlier government estimate.
With all Group of Seven (G7) economies contracting and world trade shrinking rapidly, profits at Japanese manufacturers are evaporating, hitting at the heart of the growth engine for Japan, the world's second-largest economy.
Economists expect a further big fall in GDP for the first quarter of 2009, and with domestic consumption also weak they see no recovery until later in the year.
A finance ministry survey showed Japanese companies cut spending on plant and equipment by 17.3 percent, slightly worse than a 16.6 percent slide expected, but economists say the figure was exaggerated by changes in accounting rules on leasing.
A Reuters poll after the capital spending data showed that Japan's gross domestic product (GDP) is likely to have shrunk 3.3 percent in the final quarter of 2008 from the previous quarter.
"Revised fourth-quarter GDP will confirm the severity of Japan's recession," said Kyohei Morita, chief economist for Japan at Barclays Capital.
"China's stimulus steps may give a little respite to Japanese companies this year, but Japan will face more downside risks from households as corporate woes are spreading to Japanese workers."
China vowed on Thursday to meet its 8 percent growth target this year by ramping up spending and helping exporters.
Markets focused more on signs of a turnaround in China's economy after a key gauge of Chinese manufacturing improved for the third month in a row.
Tokyo's Nikkei share average rose 2 percent while Japanese bond futures slipped as the Chinese data encouraged hopes for a recovery in Japan's economy.
"Exports to Asia have fallen since November. But they will probably start recovering from March," said Soichi Okuda, chief economist at Sumitomo Shoji Research. He said regional trade within Asia is frozen, but China's stimulus could help thaw things out.
CAPEX STALLS
The fourth quarter for Japanese companies looked bleak, however, as exports tumbled and they wound back capital spending and factories cut production and staff.
Japanese private-sector spending on plant and equipment registered the largest fall in comparable data by the Ministry of Finance going back to July-September 2002.
The data will be used in calculating revised October-December GDP, due out at 8:50 a.m. next Thursday (2350 GMT, Wednesday).
The preliminary estimate showed the economy shrank 3.3 percent, the biggest contraction since the first oil crisis in 1974 and its third straight quarter of contraction.
The economy is expected to keep shrinking for at least two more quarters as manufacturers slash production to shift piles of unsold goods as global demand for cars and electronics plunges.
There are hopeful signs, with major carmakers looking to reduce some of the production cuts in the coming months, but a rapid recovery is not on the cards.
"I expect the pace of contraction to slow gradually in the coming quarters. But we'll probably have to wait until the fourth quarter of this year to see positive growth," said Junko Nishioka, chief economist at RBS Securities.
The survey showed Japanese companies' profits fell 64.1 percent from a year earlier to 5.1 trillion yen ($51.42 billion), the lowest level for the October-December quarter since 1985.
Sales were down 11.6 percent, the largest fall on record.
To cope with what many company executives describe as an unprecedented downturn, leading exporters such as Toyota Corp and Sony have cut jobs, raising fears that already weak domestic consumption could slide.
Prime Minister Taro Aso has proposed a 75 trillion yen ($769 billion) package to shore up the economy, but the increasingly unpopular leader is faced with a divided parliament and calls for an early election that could delay fresh policy moves.
The Bank of Japan cut interest rates in October and again in December, bringing them to 0.10 percent, and has taken a series of steps to support corporate finance since late last year.
While some of the BOJ measures have helped alleviate some of the tensions in financial markets, credit spreads remain high as the bleak outlook fans fears of rising bankruptcies. ($1=99.17 Yen) (Additional reporting by Stanley White; Writing by Hideyuki Sano; Editing by Hugh Lawson)