CORRECTED - CORRECTED-UPDATE 2-Japan's machinery orders tumble, deflation lo

(Corrects 9th paragraph to... a four-month high ... not ... a four-year high. The same error occrurred in the previous update) (Adds details, comments)

TOKYO, Jan 15 - Core Japanese machinery orders fell a record 16.2 percent in November to a two-decade low, in another sign that the global crisis has stalled capital investment, while wholesale inflation hit a four-year low, highlighting the risk of deflation.

The global slowdown has hit Japanese factories hard, with big firms such as car maker Toyota Motor Corp and electronics firm Sony Corp slashing production and cutting jobs, deepening the recession in the world's No.2 economy as export orders dry up.

Falling oil and other commodity prices have eased costs for Japanese firms, but have stoked fears that price falls and weak demand could feed each other in a vicious deflationary spiral.

"Companies are forced to overhaul their capital investment plans as demand from emerging economies, which it had been hoped would make up for a slowdown in rich nations, is falling at an unexpected pace," said Hiroshi Shiraishi, an economist at BNP Paribas. "Machinery orders will likely remain very weak for a considerable period."

The drop in core private-sector machinery orders, a leading indicator of corporate capital spending, was double the median market forecast for an 8.1 percent fall and bigger than the previous record decline of 15.9 percent in July 2006.

The value of core orders was the lowest since July 1987 at 754.2 billion yen ($8.5 billion).

The final price companies charge each other for goods fell 2.6 percent from a year earlier, a rough guide to likely pressure on prices in stores, and some see consumer inflation turning negative.

"I think core consumer prices will fall this year. It's going to start falling by the middle of year at latest," said Seiji Adachi, a senior economist at Deutsche Securities.

BONDS UP, SHARES SLIDE

The weak machinery orders data pushed up Japanese government bond prices, with the lead 10-year JGB futures hitting a four-month high of 140.19, and helped push Tokyo's Nikkei share average down more than 4 percent.

The Tokyo stock market's machinery shares subindex fell more than 3 percent, with shares in Komatsu, the world's second-biggest earth-moving equipment maker, sliding 4.8 percent as the bleak data added to a wider decline in stocks due to growing fears about the state of the U.S. economy.

The meltdown of global financial markets has pushed the United States, Japan and the euro zone into recession and slowed growth in China and other emerging economies, battering Japan's key export destinations.

Many economists expect Japan's export-reliant economy to keep shrinking at least until the first quarter this year -- four consecutive quarters of decline and the longest such slide on record -- as manufacturers cut output as global demand plunges.

A Japanese newspaper reported on Thursday that the Bank of Japan will examine the possibility of buying corporate bonds outright to ease credit strains.

But many economists doubt the BOJ will take such steps immediately after rates on commercial paper slid following its rate cut and announcement last month that it would buy such paper.

DEFLATION RISK RISING

Fuelling worries among some economists that deflation could return to haunt the economy, annual wholesale inflation slowed to 1.1 percent in December, above a median market forecast for 0.9 percent but less than half the 2.8 percent rise seen in the year to November.

It was the lowest level of wholesale inflation since May 2004 and prices fell sharply in the month, prompting some analysts to warn that deflation in wholesale prices loomed.

"Wholesale inflation is slowing now mainly due to declines in raw material costs. Weak demand may add to the downward pressure on prices in the months ahead," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"There's a good chance wholesale prices will start falling year-on-year sometime in the January-March quarter."

The index on domestic final consumer goods, sometimes seen as a proxy to consumer price trends, fell 2.6 percent in December from a year earlier.

Japan began suffering mild deflation from 1998, with some economists saying it ended in 2006 due to a recovery in the economy. But the economy slipped into recession last year.

While many economists expect core consumer prices to turn negative in the coming months, few see a return to prolonged deflation. ($1=88.99 Yen)