UPDATE 1-Japan wholesale deflation slows but demand anemic

(For more stories on the Japanese economy click [ID:nECONJP])

* Weak demand means interest rates to stay low

* New government stimulus impact unlikely until next year

* BOJ already expecting prices to fall for three years (Adds analyst comment, details)

TOKYO, Nov 12 (Reuters) - Japanese wholesale deflation eased in the year to October, but compared with the previous month price falls gathered pace in a sign that corporate activity remains subdued in the face of sluggish domestic consumption.

Weakening demand means deflation will persist for a few years, prompting the Bank of Japan to promise to keep interest rates very low for the foreseeable future.

"I think we need to be more cautious about deflationary pressure," said Shuji Tonouchi, a senior fixed income strategist at Mitsubishi UFJ Securities.

"Materials costs are falling, but demand in Japan is also weak. There's not much the Bank of Japan will do as the BOJ is already forecasting three years of falling prices. As for the government, they're considering an extra budget to create more jobs, but the impact won't be seen until next year."

Wholesale prices, as measured by the corporate goods price index (CGPI), fell 6.7 percent in the year to October, easing from an 8.0 percent slide in the year to September and a record 8.5 percent fall in the preceding two months.

The reading was worse than economists' median forecast for a 6 percent annual decline. [JPCGP=ECI] [JPCGPY=ECI]

Wholesale prices fell 0.7 percent in October from September, faster than the median estimate for a 0.1 percent decline and a reading of flat in September.

Domestic final goods prices, a component of the wholesale price which loosely track the consumer price index, dropped 2.8 percent in the year to October after falling a revised 3.4 percent in the 12 months to September.

For a graphic of wholesale and consumer prices, click:

here

The BOJ said late last month that it expects both consumer prices and wholesale prices to keep falling at least until the year to March 2012 and said it will maintain an easy policy stance to support the economy. [ID:nT32693]

Although the price slide is likely to moderate further as the impact of a slide in oil prices from record highs last summer wears off, weak domestic demand means wholesale price falls could persist.

That could translate into lower consumer prices, prolonging the country's second bout of deflation in less than a decade.

Japanese core consumer prices fell 2.3 percent in September after a record 2.4 percent fall in August as dire job market conditions are seen curbing consumer spending.

Still, most economists expect the Japanese economy to grow slowly. Most analysts polled by Reuters believe the chances of a second economic contraction after the worst recession on record are slim, a view shared by the Bank of Japan.

But the government is worried that the economy could stumble into recession again, leading to speculation that it may draw up more stimulus spending plans before the end of the current fiscal year in March. (Reporting by Hideyuki Sano; Editing by Hugh Lawson)