TOKYO - Japan's government is set to slash its forecast to a 3.3 percent economic contraction for the year to next March, a government source said, bringing the government's outlook much more into line with other forecasters.

The government's revised forecast may affect a Bank of Japan policy review meeting next week, when the central bank is set to downgrade sharply its own half-yearly economic forecasts in the face of Japan's worst recession since World War Two.

Private sector economists say a government forecast for such a contraction would be much closer to their forecasts, which range from around a 3 percent contraction to around 5 percent.

BOJ officials say their expectations are similar.

With the IMF tipping the world economy overall to contract 1.3 percent this year and Japan's exports running about half the levels of a year ago, Japan faces an uphill task restoring growth in the world's No.2 economy despite a record US$157 billion (S$236 billion) largely debt-funded stimulus package.

"Recent data has shown signs the economy may bottom out soon and the stimulus package will help it gradually recover in the latter half of this year," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute, who sees a forecast of a 3.3 percent contraction as close to reality.

"But any recovery won't be a strong one as the deterioration in capital expenditure and consumption has only just begun."
In January, the government had forecast zero growth for the 2009/10 fiscal year but there have been further slides in industrial production, business confidence and capital expenditure since then.

New spending in the stimulus package, at around 3 percent of GDP, is expected by the government to push up gross domestic product by about 2 percentage points.

The central bank's current forecast, issued in January well ahead of the stimulus package, was for a 2 percent contraction.

Finance Minister Kaoru Yosano has said the government needed to revise its growth forecasts as tumbling global demand has dealt the export-reliant economy an unexpectedly heavy blow.

Big Japanese manufacturers have been hit hard by the worst global downturn since the 1930s.

Exports last month showed tentative signs of a recovery, but the pain is spreading to households through rising unemployment and falling wages, boding ill for the economy.

The IMF 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 don't include.

The government usually reviews its economic forecasts in the summer but is expected to come up with new forecasts much earlier this year to reflect the sharp deterioration in the economy.

Japan's economy shrank 3.2 percent in the last quarter of last year, the fastest contraction since the oil crisis in 1974, and economists say the economy may have shrunk even more in the first quarter.

It is likely to keep shrinking for the first half of this year, economists say, running up a record five quarters of contraction.