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By Yuzo Saeki
TOKYO, Dec 9 (Reuters) - Japan's economy sank deeper into recession in the third quarter than initially estimated, reinforcing fears that the world's second-largest economy is facing its longest contraction ever.
The export-driven economy now looks likely to keep shrinking at least until the first quarter of next year -- which would mark a postwar-record four straight quarters of decline -- as leading manufacturers slash output to deal with a slump in global demand.
"Japan will need to endure hardship next year," Economics Minister Kaoru Yosano said. "Policy efforts are necessary to keep the economy from deteriorating sharply."
Tumbling support rates are increasing pressure on Prime Minister Taro Aso to put together an emergency spending package, which one newspaper said could total $216 billion, or around 3.6 percent of gross domestic product (GDP).
Major Japanese exporters such as Toyota and Sony are facing a dire outlook, with the euro zone and the United States also in recession, and growth slowing in big emerging markets such as China.
Japan's economy contracted 0.5 percent in July-September, far more than the preliminary figure of a 0.1 percent decrease, revised GDP figures showed on Tuesday.
For a graphic tracking Japanese GDP, click:
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"The revision was bigger than expected. Given further weakness in exports and capital spending since October, the economy's contraction will deepen in the fourth quarter," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.
Some analysts speculate the Bank of Japan will cut interest rates again by March, the end of the business year, after lowering its key rate to 0.30 percent from 0.50 percent in October.
However, derivative contracts are pricing in a less than 30 percent chance of another 0.20 percentage point cut by then.
SPENDING SPREE?
Faced with gloomy economic data and disgruntled voters, Aso has called for a new spending package to ease the pain of a worsening job market. Support for his government has dived, with polls showing many Japanese want an early election even as Aso tries to work on resuscitating the economy.
The Yomiuri daily reported that the government was considering compiling a package that would include outlays worth 15 trillion yen to 20 trillion yen ($161 billion-$216 billion) to be spent over the next three years.
That would come on top of 5 trillion yen in extra spending announced after the financial crisis rocked the global economy in September.
Japan's fiscal splurge would be in line with efforts by governments around the world to prop up faltering economies with greater public spending.
U.S. President-elect Barack Obama last week pledged to create more than 2.5 million new jobs by 2011 and launch the largest investment in U.S. infrastructure since the 1950s.
This week, European Union leaders will discuss a 200 billion euro spending plan.
Australia began handing out more than A$8 billion ($5.27 billion) to consumers, as part of fiscal measures unveiled in October.
Some doubt Japan's ability to spend its way out of the crisis.
Hiromichi Shirakawa, chief economist at Credit Suisse, said a fiscal stimulus of the reported size would probably lead to a rise in Japanese interest rates, given concerns about Japan's fiscal health. Rising rates could erase the positive effect of the extra spending on the economy.
Shirakawa also said that the impact of payouts on individuals is uncertain as consumers may choose to save rather than spend.
The Japanese economy shrank at an annual rate of 1.8 percent in the third quarter, contracting three times faster than the U.S. economy in the same period.
That fall was deeper than estimated, mainly due to a mark-down in inventory and government spending.
Capital spending, a key driver of growth until recently, was revised down to minus 2.0 percent from minus 1.7 percent, a change not large enough to affect the overall growth rate.
EXPORTERS' WOES
In another sign of economic trouble, Japan's index of coincident economic indicators in October fell to the lowest level in 4-½ years, government data showed.
The index is based on 11 indicators, including industrial output, retail sales and overtime work.
The meltdown of global financial markets since mid-September has shattered hopes for a short and shallow recession in Japan, with fears growing that Japan's recession could last longer than ever before.
The previous record was three quarters in a row, as in the last contraction seven years ago after the bursting of the dot-com bubble.
Until the third quarter, the economy's weakness had largely been attributed to high oil prices. But Japan is expected to feel the full effect of the global downturn in the fourth quarter and beyond.
Susumu Kato, chief economist at Calyon, said the downturn was much more severe than previously thought.
"We've been expecting a 0.4 percent contraction in fiscal 2008/09 but that now needs to be revised down. It's hard to see at this point how the economy will return to a recovery," he said.
Recent data showed Japanese companies are curtailing production at an unprecedented pace as demand plunges not just in the United States and Europe but also in emerging nations that had until recently weathered the global financial storm.
A sharp appreciation in the yen since October is making things even more difficult for exporters, cutting into their overseas earnings when converted into yen and hurting the global competitiveness of their products.
Economists say the closely watched tankan corporate survey by the Bank of Japan due next Monday will show a plunge in Japanese corporate sentiment. ($1=92.80 Yen) ($1=1.518 Australian Dollar) (Editing by Sophie Hardach)