TOKYO (AFX-ASIA) - The Cabinet Office cut its year to March real GDP forecast to a 0.9 pct contraction, in line with expectations and earlier leaks in the domestic press, with little market reaction to the news, analysts said. However, some noted that the numbers, though unsurprising, re-emphasised that the government's commitment to fiscal propriety will be severely tested by the reduction in tax revenues suggested in the report. Significant here was the Cabinet's downgrade of the nominal GDP estimate to a 2.3 pct decline from its previous forecast of a 1.0 pct rise. Government officials this morning reaffirmed the commitment to keeping new bond issuance below 30 trln yen in the current and next fiscal years, while simultaneously keeping open the possibility of ditching the policy later. Finance Minister Masajuro Shiokawa said the economy is not yet in a "catastrophic situation", adding that the government still plans to hold to its cap on issuing new bonds. "I often say that we will not stick to the 30 trln yen bond limit at any cost. If a critical event emerges, or forceful measures that ensure economic recovery become available, we will spend more to finance this," Shiokawa said. "However, that doesn't mean the government will rely on new issuance of bonds. We need to find other sources of finance," he said. "We will write the next fiscal year's budget, keeping to the 30 trln yen bond limit." State Minister for Economic and Fiscal Policy Heizo Takenaka said he does not think the government needs to compile a second supplementary budget to boost demand, even as the first such stimulus package enters parliament. "I don't think it is necessary for now because Japan is not yet falling into a deflationary spiral," he said. However, some observers noted that officials are unlikely to admit to a further tranche of spending that would make the revenue calculations supporting the first supplementary budget redundant before it passes through parliament. "They are saying the economy is going to shrink and 'that's it; we're not going to do anything'," ING Baring chief economist Richard Jerram said. "The main issue is figuring out how they are going to wriggle out of the bond cap," he said. "In the end, it's dead, one way or another." JP Morgan chief economist Masaaki Kanno agreed that the numbers were uninteresting in themselves but also noted the implications for fiscal policy. "It's in line with, first, the leak from government sources, and very close to the BoJ official view, so it's not surprising at all," Kanno said. "The reason why it was disclosed today is the government submitted the supplementary budget to the Diet (parliament)," he said, adding: "The (budget) bill assumed a downward revision for tax revenues." However, Kanno believes the government's estimate of around a 2 pct decline in revenue is much too conservative, saying: "Tax revenue should be down some 3.5 pct... so it still seems very high." Ultimately then, Prime Minister Junichiro Koizumi's attempt at fiscal rectitude must either be abandoned or the government will have to make deep cuts in spending to meet the 30 trln yen bond target. "This has big implications for next year. Next year the nominal growth will likely be down 2-3 pct (in line with this year's revised forecast) so tax revenue will be down too," Kanno said. "If Koizumi wants to keep to the 30 trln yen, they have to cut spending by the same amount (of decline in revenue), which is very contractionary ... and very bad given the economic conditions for Japan and the world," he said. Kanno said the revised GDP components were of only academic interest, noting though that the worsening of Japan's trade terms reflect an ongoing "hollowing out" of industry that could offer worrying implications for the world. "Imports have remained firm, reflecting the increase of imports from China and other Asian countries, (in turn) reflecting the hollowing-out effect and tak ing advantage of wage differentials," he said. "The dominance of production of China is likely to have a large impact on Japan ... and probably in the rest of the world ... as China's share of the world market expands," he added. Others simply reiterated the unsurprising nature of the GDP figures. "The numbers are simply catching up with reality. I don't think there's anything significant or surprising in them," HSBC senior economist Peter Morgan said, adding they follow an already negative forecast by the Bank of Japan. The foreign exchange and equity markets largely ignored the data. "It's fine that they lower the forecast. But the announcement did not come with any policies aimed at propping up the economy and pushing structural reforms," said Kazunori Jinnai, general manager of equities at Daiwa SMBC. "Market participants were disappointed by the lack of new economic measures. They are losing their confidence in the current administration," he said.