Japan machinery orders rise, but euro zone clouds outlook

TOKYO (Reuters) - Japan's core machinery orders rose in June for the first time in three months, rebounding from a record drop in May, but companies expect orders to slide in the third quarter as uncertainty over global economy keeps companies from boosting capital spending.

The data cast some doubt about the Bank of Japan's forecast of a moderate economic recovery though the central bank is expected to keep monetary policy unchanged at its two-day rate review that ends later on Thursday.

Core machinery orders, used to gauge the strength of capital spending -- a key driver of the world's third biggest economy, rose 5.6 percent, compared with a median forecast for a 10.9 percent rise. It followed a 14.8 percent fall in May, the biggest decline since comparable data became available in April 2005.

Companies surveyed by the Cabinet Office have forecast that core orders, which exclude those for ships and machinery at power utilities, will fall 1.2 percent in July-September from the previous quarter. The orders fell 4.1 percent in April-June, the first decline in three quarters.

Analysts expect capital spending to rise up in the coming months on the back of reconstruction spending worth 3.6 percent of Japan's gross domestic product, but uncertainty over Europe's debt crisis and the performance of the Chinese and U.S. economies could make companies hesitant to invest in plants and equipment.

"I expect capital spending to firm up in the coming months as China and other emerging market economies bottom out in the summer. But Europe's debt problems pose the biggest risk to this scenario," said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Morgan Stanley Securities.

"As such, the Bank of Japan will stand pat on policy today. But further easing cannot be ruled out in the coming months, particularly if market turmoil stemming from Europe's crisis causes a sudden spike in the yen and a plunge in share prices."

The Cabinet Office, which compiles the data series, cut its assessment of machinery orders and said that they were moving sideways, compared with its previous view that they were growing moderately as a trend.

The Bank of Japan may escalate its warnings over slowing global demand and renewed gains in the yen, signalling its readiness to ease again if the economy's recovery comes under threat.

Japan's economy is expected to outperform most other developed nations this year with a boost from solid domestic demand, but analysts have slashed forecasts for factory output as the global slowdown becomes more pronounced, according to a Reuters poll last month. <ECILT/JP>

(Writing by Tetsushi Kajimoto; Editing by Tomasz Janowski)