Dec. 8 (Bloomberg) -- Japan's economy grew at less than half the pace the government estimated last quarter as consumers pared spending and growth in corporate investment cooled.

The world's second-largest economy expanded at an annual 0.8 percent rate in the three months ended Sept. 30, slower than an initial estimate of 2 percent, the Cabinet Office said today.

Slower economic growth may prompt the Bank of Japan to delay raising the lowest borrowing costs among major economies until next year. Bond yields were little changed on speculation the bank will wait for its quarterly Tankan business confidence survey next week before deciding whether to raise interest rates.

``The market can't decide if the BOJ will raise rates this month or not by just looking at GDP figures,'' said Kosuke Hanao, head of foreign exchange in Tokyo at HSBC Bank. ``Today's figure won't have much impact on the yen.''

The yen traded at 115.18 per dollar at 11:26 a.m. in Tokyo, compared with 115.25 before the report was published. Yields on the benchmark 10-year government bond rose 2 basis points to 1.69 percent. The median forecast of 19 economists surveyed by Bloomberg News was for annualized economic growth of 1.1 percent.

Outlays on factories and equipment were slower than the government initially estimated. Capital spending in the third quarter climbed 1.5 percent, less than the 2.9 percent reported Nov. 14. The revision was in line with economists' expectations.

Consumer Spending

Consumer spending, which accounts for more than half of the economy, fell 0.9 percent, worse than the 0.7 percent in the preliminary report, as bad weather kept shoppers at home and wage growth stalled.

The central bank raised the key overnight lending rate to 0.25 percent in July, its first rate increase in almost six years.

``This doesn't necessarily put the Bank of Japan out of play for later this month,'' said Huw McKay, senior international economist at Westpac Banking Corp. in Sydney. ``It's undoubted that the consumer could be doing a lot better. But they need the income before they can spend it.''

Wages stalled in October and have risen less than 10,000 yen ($86) this year, according to the labor ministry. The government downgraded its evaluation of the economy last month for the first time since 2004, citing sluggish consumer spending.

Spending on durable goods including televisions and services were among items that consumers cut back on, the government said, including breakdowns of personal consumption for the first time in today's report.

No `Soft Patch'

From the previous quarter, the economy expanded 0.2 percent, slower than the 0.5 percent initially estimated, the Cabinet Office said. In nominal terms, which don't take into account price changes, the economy failed to grow for a second quarter. The government last month said nominal growth was 0.5 percent.

The GDP deflator, a broad measure of prices used to derive real growth from nominal, fell 0.7 percent from a year earlier, the smallest drop since the fourth quarter of 2004 when a surge in the cost of fresh food pushed up prices.

Today's report doesn't change the government's view that the economy is recovering, Chief Cabinet Secretary Yasuhisa Shiozaki told reporters in Tokyo. Economic and Fiscal Policy Minister Hiroko Ota said her view on the economy hasn't changed and there's no sign of it falling into a ``soft patch.''

The Bank of Japan has warned keeping interest rates at low levels may cause excessive business investment and asset-price bubbles that could derail the country's longest postwar economic expansion. Governor Toshihiko Fukui, speaking three times last week, said higher rates were ``unavoidable'' to sustain growth.

Mizuno, Nishimura

Other board members this week signaled the bank may be preparing for a rate increase at the conclusion of the final policy meeting of the year on Dec. 19.

Atsushi Mizuno said weak data won't prevent the bank from raising rates, while fellow board member Kiyohiko Nishimura said the bank could act even if investors hadn't reached a consensus over the timing of the next shift.

Finance Minister Koji Omi today said the central bank should ``firmly'' support the economy with its monetary policy.

The central bank and investors will pay attention to a report on machinery orders later today as well as the Tankan survey for signs of investment plans, according to Seiji Adachi, senior economist at Deutsche Securities Inc. in Tokyo.

Machinery orders, which typically point to capital spending in three to six months, probably rose 6.2 percent in October, according to the median forecast of 39 economists surveyed by Bloomberg News. The Cabinet Office will release the machine orders survey at 2 p.m. in Tokyo.

Inventories

Today's revised gross domestic product figures include additional information, mostly for corporate spending and inventories, released since the Cabinet Office published the preliminary report last month.

Capital spending rose 12 percent in the third quarter, slowing from a record 16.6 percent in the previous three months, the Ministry of Finance said on Dec. 4. The report is a key contributor to today's revised figures, comprising about 60 percent of the corporate outlays component of GDP.

Inventories added 0.2 percentage point to quarter-on-quarter growth, matching economist expectations, less than the 0.3 percent initially estimated, after the decline in consumer spending left companies with unsold goods.

Companies boosted inventories by 1.46 trillion yen in the third quarter, more than the 252 billion yen increase in the same quarter a year ago, the finance ministry said.

Profit Growth `Solid'

The same survey showed corporate profits rose 15.5 percent last quarter, the fastest pace in two years, signaling companies will keep increasing spending, Hiroaki Muto said.

``Corporate profit growth has certainly been more solid than anticipated,'' said Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. A slowdown in capital spending ``is only a temporary phenomenon.''

The Bank of Japan's quarterly Tankan survey, scheduled for release on Dec. 15, is expected to show companies plan to boost spending 12.2 percent in the year ending March, the fastest rate in 16 years, according to economists surveyed by Bloomberg News.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

Last Updated: December 7, 2006 21:28 EST