TOKYO, April 25 - Japan's government on Wednesday downgraded itsestimate for economic growth in the final three months of last year, underlining thestruggle ahead for the incoming administration of Junichiro Koizumi. Japan's gross domestic product rose a revised 0.7 percent in real terms in October-December from the previous quarter, compared with a preliminary estimate of 0.8percent growth, as net exports dipped and firms made modest plans amid theeconomy's worst slowdown in decades. Economists said the downward revision was hardly surprising, coming on the heels ofweaker economic indicators and a series of downgrades of the government's officialview on key activity, including consumption and exports. The government cited a decline in net exports as the main reason for the lower headlinefigure. Japan's exports have been hurt by slackening demand from the U.S. economy. "The decline in external demand made a larger contribution to the fall in GDP thananything else," a government official said. Exports rose 0.8 percent in October to December, slightly outperforming an earlierforecast of a 0.6 percent rise. Imports rose 5.1 percent, up from a preliminary estimateof 4.5 percent. Private capital spending rose a revised 6.7 percent in the three-month period, downslightly from the preliminary estimate of a 6.8 percent rise, the government said. The GDP deflator for October-December stood unchanged at minus 1.7 percent froma year earlier. "Corporate capital spending is slowing more than we had expected," said KazuhikoOgata, senior economist at HSBC Securities Japan. "The government's business survey yesterday showed that firms plan to cut capex by5.5 percent in fiscal 2001/02, compared with a rise of 3.5 percent in the previous fiscalyear. That is worse than a 5.3 percent drop in fiscal 1998/99 when there was afinancial crisis, so that was a shocking figure." Ogata was referring to a quarterly business survey released on Tuesday by thegovernment's Economic and Social Research Institute showing firms planned to cutcapital spending. The same survey showed business sentiment worsened in the January-March quarter,tumbling to a reading of minus 31 -- its worst since the last quarter of 1998 -- fromminus one in the October-December quarter. ECONOMIC PUZZLE Others said the downgrade was not as drastic as they had feared. "The revision in the headline figure was a marginal 0.1 percentage point, so we don'tintend to change our view based on the data," said Minako Iida, economist atDeutsche Securities. But the figures are a bleak reminder of the task facing premier-in-waiting JunichiroKoizumi, chosen on Tuesday as president of the dominant Liberal Democratic Partyand hence the next prime minister. Koizumi has said he wants to control Japan's spiraling debt, but doing so while theeconomy is teetering on the brink of recession and sorely in need of help will be atricky political and economic puzzle. "I think there will be talk of an extra budget before the election," HSBC's Ogata said. "If an extra budget results in five trillion yen ($41 billion) worth of additional Japanesegovernment bond issuance, for instance, that would mean Koizumi broke his promise.That could hurt sentiment, although (an extra budget) could help push up theeconomy." The government has forecast 1.2 percent growth in GDP for the full fiscal year thatended in March. That means growth in the January-March period must be better thana 0.3 percent contraction. Most economists think that will be achieved, with a recent survey showing amedian forecast for January-March growth at 0.5 percent. They expect to see a rise in private consumption -- the lion's share of the economy --although much of that will likely be due to buying ahead of a new recycling law thatmakes consumers pay more for throwing out old television sets and washing machines. The government is targeting growth of 1.7 percent for the fiscal year that began thismonth, although most economists say that will be hard to achieve. Even Japan'sEconomics Minister, Taro Aso, has admitted it will be tough. The median forecast in a survey last week was for growth of 1.3 percent.