April 27 (Bloomberg) -- Japan’s government said the economy will shrink a record 3.3 percent this fiscal year as exports and corporate spending tumble at an unprecedented pace.

The Cabinet Office cut the forecast for the year started April 1 from a January prediction for zero growth. Finance Minister Kaoru Yosano told parliament that the economy remains in a “crisis” as the slump in exports and industrial output take a toll on employment and companies struggle to raise funds.

The world’s second-largest economy would contract as much as 5.2 percent without Prime Minister Taro Aso’s 15.4 trillion yen ($159 billion) stimulus plan, funding of which was approved by the Cabinet today, the government said.

“Though Japan’s economic outlook remains dire at this stage, the Aso stimulus package is the most positive policy development Japan has witnessed in many years of stagnation,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong.

The GDP forecast was brought forward from July after Cabinet Office economists predicted that the economy may have contracted about 14 percent in the first quarter on an annualized basis.

Yosano played down recent reports that showed the pace of the economy’s decline may be moderating. Exports rose in March from February on a seasonally adjusted basis, the first month- on-month gain since May 2008. Confidence among merchants, consumers and small businesses all climbed last month.

Not Optimistic

“We shouldn’t be too optimistic,” Yosano said at a news conference. “We need to think about things on the assumption that economic conditions will remain very severe.”

The International Monetary Fund said last week that Japan’s economy will shrink 6.2 percent in 2009, the worst among advanced economies, compared with its January projection of a 2.6 percent contraction.

The Cabinet approved a record 13.9 trillion yen extra budget for this fiscal year to help pay for the measures aimed at pulling Japan out of its worst recession since World War II.

“This extra budget is extremely exceptional expenditure to deal with an emergency,” Yosano said. “Exports have declined more than expected, devastating companies. That’s the main reason for Japan’s economic downturn.”

Shipments abroad are likely to fall an unprecedented 27.6 percent in the period. Capital spending is estimated to decline a record 14.1 percent, and the unemployment rate will rise to 5.2 percent from 4.4 percent, the Cabinet Office said.

Deflation May Resurface

The government also said there is a risk that deflation may resurface in the current business year. A measure of consumer prices that includes fuel and fresh foods will fall 1.3 percent, the biggest drop since records began in 1971.

“Japan’s stimulus plan will create some demand to help the economy,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “But it’s unlikely to create sufficient jobs to help households, so it’s not enough to bring the economy back on a sustainable recovery track.”

Aso’s package includes measures to bolster the job market, encourage investment in energy-efficient technology and provide credit to companies. The plan, Aso’s third since taking office in September, takes his total stimulus spending to 25 trillion yen, or more than 5 percent of gross domestic product.

In trying to spend his way out of the recession, Aso is increasing a public debt burden that’s already the world’s largest. Including the money pledged today, the annual budget will rise to 102.5 trillion yen, the largest ever.

More Bond Sales

The government will sell 10.8 trillion yen in new bonds to pay for most of the extra budget, according to a proposal released by the Finance Ministry today. That will bring new bond sales for the fiscal year to a record 44.1 trillion yen, and total sales to 130.2 trillion yen, also the highest ever.

“Investors may demand higher yields and coupons before buying, which would eventually push up the government’s funding costs,” said Susumu Kato, chief economist at Calyon Securities in Tokyo.

The yield on the 10-year bond rose 1.5 basis points to 1.435 percent at 1:31 p.m. in Tokyo.

Japan’s public debt will probably spiral to 197 percent of GDP next year, according to the Organization for Economic Cooperation and Development. The OECD estimate was published before the government released the stimulus package on April 10.

Yosano said today that the government needs to keep a grip on its finances over the medium to long term.

“I will steadily move forward with efforts to maintain fiscal discipline as well as establish a sustainable social security system that receives stable funding,” Yosano said in his speech to lawmakers after submitting the extra budget.

Yosano said earlier this month that the government is considering setting a new fiscal target after conceding that former Prime Minister Junichiro Koizumi’s goal of balancing the budget by March 2012 won’t be met.

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: April 27, 2009 00:37 EDT