TOKYO (Reuters) - Japan's economy grew less than initially reported in the fourth quarter as capital expenditure declined in a worrying sign that a rebound in consumer spending is not encouraging business investment.

The economy grew an annualised 1.5 per cent in October-December, down from a preliminary reading of an annualised 2.2 per cent expansion and below the median estimate for 2.2 percent growth.

Consumer spending in the fourth quarter was revised up, showing some parts of the economy are improving. However, weak capital expenditure suggests policymakers are overly optimistic about the economic rebound from a recession, reinforcing doubts about the central bank ability to reach its 2 per cent inflation target.

"One reason for disappointing capex is the shift in production overseas that has been happening for the past few years," said Norio Miyagawa, senior economist at Mizuho Securities. "I still expect the economy to continue to grow, but the virtuous economic cycle that policymakers have been talking about really hasn't fallen into place yet."

On a quarter-on-quarter basis, the economy grew 0.4 per cent in the fourth quarter, Cabinet Office data showed Monday. That compared with a preliminary reading of a 0.6 per cent increase and the median estimate for 0.6 percent growth.

The main reasons for the GDP downgrade were weak business investment and inventories.

Capital expenditure fell 0.1 per cent from the previous quarter, less than a preliminary 0.1 percent increase and less than the median estimate for a 0.3 per cent expansion.

Inventories subtracted 0.2 percentage point from growth, down from a preliminary 0.2 percentage point contribution.

Consumer spending, which is crucial to achieving policymakers' aim of creating a domestic-demand driven economy, rose 0.5 per cent, more than a preliminary 0.3 per cent increase.

Data last month showed industrial output rose in January at the fastest pace in almost four years, showing the manufacturing sector is picking up momentum.

Other data this year on consumer spending has been less convincing, and there are lingering doubts whether the Bank of Japan can achieve 2 per cent inflation sometime around next fiscal year starting from April.