By Hideyuki Sano
TOKYO (Reuters) - Japan may be in a deeper recession than first thought as businesses cut spending because of the worsening global recession, which will likely force central banks in Britain and Europe to slash interest rates later on Thursday.
China pledged to support U.S. efforts to stabilize financial markets and said its biggest contribution to the cause is its pursuit of fast, stable growth in the face of what some economists believe is the sharpest slowdown since World War Two.
Japanese companies cut investment in the third quarter by a higher-than-expected 13 percent from a year ago, a report showed, leading economists to expect gross domestic product data, which initially already showed contraction, will be adjusted lower.
"With the decline in capital spending this big, it's likely that third-quarter gross domestic product will be revised down," said Kyohei Morita, chief economist with Barclays Capital. "There's a growing chance that Japan's economy will remain in recession until the second quarter of next year."
The bleak reading on Japan's economy put additional pressure on policymakers to boost domestic spending as weak overseas demand cripples the manufacturing sector. Central bankers in other countries faced the same dire situation.
The European Central Bank is expected to cut interest rates to at least a two year low later after a policy meeting, and the Swedish central bank could reduce rates as well. The Bank of England could roll back rates to their lowest in more than half a century with Britain seen heading for a full-blown depression.
Policymakers at the BoE had already discussed slicing more than 200 basis points off borrowing costs last month, but opted for a smaller, though still staggering, 150 basis point reduction to 3 percent because they did not want to spook investors.
However, steadily deteriorating conditions since then has raised fears Britain could be heading for a much deeper downturn than anybody expected, and analysts warn policymakers must act now to ward off the much graver threat of deflation.
Central banks in Australia, New Zealand and Thailand this week have lowered rates sharply as what started as a credit crunch last year has now mutated into an economic crisis that has left no region untouched.
Even China, which was the world's fastest growing economy, has felt the sting of the global recession, with property developers and factories taking big hits.
Capital Economics lowered its forecast for Chinese economic growth next year to 7 percent from 8 percent, on a run of poor data and doubts about the effectiveness of Beijing's $585 billion stimulus plans.
China's Vice-Premier Wang Qishan said restoring confidence and avoiding a global financial meltdown must be the priority for policymakers, at the kickoff for the "Strategic Economic Dialogue" with U.S. Treasury Secretary Hank Paulson.
A report overnight showing U.S. private employers shed 250,000 jobs in November -- the most in seven years -- left futures markets reflecting a 50/50 chance the Federal Reserve will cut its benchmark rate by 75 basis points to 0.25 percent on or before its next policy meeting on December 16.
The jobs data from ADP Employer Services also suggested Friday's more comprehensive government report could show job losses in excess of 300,000, which would be the highest since the aftermath of the September 11, 2001 attacks.
"With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since World War Two appears to be on track," said JPMorgan economists in a research note.
(Additional reporting by Reuters bureaus worldwide)
