Japanese firms raised capital spending in July-September for the first time in more than three years but profit and sales growth slowed, as a dip in demand both at home and abroad, spurred by a strong yen, clouds the economic outlook.

The data, while pointing to an upward tweak when third-quarter GDP figures are revised next week, will keep the Bank of Japan under pressure to maintain its very loose monetary policy, with slowing exports and the waning impact of government stimulus likely to trigger a fall in GDP in the current quarter.

Many economists expect Japan's economy to begin growing again next year, as Asia's emerging economies power ahead and the yen stabilizes after nearly hitting a record high last month, but the euro zone's debt woes have added to uncertainties on the horizon and kept growth forecasts modest.

"The rise in capital spending is expected to mean the capex component in revised GDP being raised," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"But looking at details in the data such as recurring profit levels, you can see that the stronger yen and a slowdown in overseas economies are affecting the economy."

The government's initial estimate showed GDP in the third quarter grew 0.9 percent, or an annualized 3.9 percent.

Analysts expect this to be revised to 1.0-1.1 percent, or 4.1-4.4 percent annualized, while some note that revised figures may end up far from their forecasts due to revisions of the previous fiscal year's GDP data.

SLOW IMPROVEMENT

Japan's capital spending has been slowly improving since last year as the economy recovered from the global financial crisis, which hammered corporate profits and investment.

The 5 percent rise in capital spending in the third quarter, led by auto makers and electronic device makers, followed a 1.7 percent drop the previous quarter, Ministry of Finance data showed on Thursday.

The data is used to calculate revisions to gross domestic product figures for the third quarter, which are due for release Dec. 9.

It was the first annual increase in capital spending since the first three months of 2007, while manufacturers raised their investment for the first time since April-June 2008.

Compared with April-June, capital spending excluding software was up 1.9 percent on a seasonally adjusted basis, posting a second straight quarter of rises, MOF data showed.

Although the trend has turned the corner, the volume of capital spending is still less than 70 percent of what it was three years ago, before the collapse of U.S. investment bank Lehman Brothers in 2008 triggered the global financial crisis.

"Overall, the data showed continued improvement in the corporate sector ... but we must carefully watch the trend ahead," a ministry official said, noting slower growth in sales.

Firms' recurring profits rose 54.1 percent in the third quarter from a year earlier, slowing from annual growth of 83.4 percent in the previous quarter.

Sales grew 6.5 percent, easing from the prior quarter's 20.3 percent pace. The quarterly data covered 23,009 companies capitalized at 10 million yen ($120,000) or more.

Economists polled by Reuters expect the economy to shrink 0.1 percent in October-December as exports slow and auto output slumps after the expiry of government incentives for purchases of low-emission cars.

The Bank of Japan, worried by uncertainties in the economic outlook, eased monetary policy in October by pledging to keep rates effectively at zero until the end of deflation is in sight and to spend 5 trillion yen ($60 billion) on assets ranging from government bonds to corporate debt.

The BOJ has said that expanding the fund is a clear option if the looming slowdown proves worse than expected. But the yen's retreat from 15-year highs scaled early last month makes any radical near-term action unlikely.