(Adds BOJ comments)
By Yumiko Nishitani
TOKYO Feb 9 Japanese corporate bankruptcies soared in January and a freeze in capital markets forced companies to borrow from banks at a record pace, suggesting that Japan's efforts to revive financial markets were struggling to take hold.
With a collapse in global demand hitting Japan's leading exporters hard, triggering cuts in production and jobs, the world's second-biggest economy appears to be slipping deeper into recession along with much of the developed world.
Core Japanese machinery orders, a leading indicator of the health of the manufacturing-oriented economy, fell 1.7 percent in December to a two-decade low, while Japan's current account surplus slid 92 percent in December from the same month a year earlier.
Corporate bankruptcies rose 16 percent to a six-year high for the month of January, and with two months until the fiscal year-end on March 31, the number of bankruptcies among listed companies is already at a record high for any financial year since World War Two, research firm Tokyo Shoko Research said.
Real estate developers and construction companies were hit particularly hard, as their funding conditions deteriorated sharply amid the global credit crisis while banks and investors also shunned these sectors.
These woes are now spreading to other sectors as massive falls in exports are weakening just about every export industry.
"Bankruptcies are likely to increase further. It's unclear if the government can bail out key industries," said Takeo Okuhara, an economist at Daiwa SB Asset.
Japan's government said last month it would offer public funds to support companies facing difficulties.
But a split in parliament means the government's initiatives -- including Prime Minister Taro Aso's fiscal stimulus package with 12 trillion yen ($131 billion) in spending -- may take time to be implemented.
The central bank has been trying to ease the pain of corporate finance, taking steps including buying commercial paper. It has also pledged to buy corporate bonds and shares held by banks.
Although tension in the commercial paper market has eased in the past month, the overall corporate debt market remains strained, widening credit spreads sharply and making it hard for companies with low credit ratings to issue debt in markets.
That led bank lending to rise 3.7 percent in January from a year earlier, Bank of Japan data showed.
Following a slight downward revision for December, January's rise from a year earlier was the largest since the central bank started publishing the data in 2000.
The outstanding balance of commercial paper held by banks fell 10.1 percent in January from a year earlier after a 15.0 percent drop in December, reflecting problems in credit markets.
The pace of fall slowed from the past few months after the BOJ said it would buy 3 trillion yen ($32.6 billion) of commercial paper by the end of March.
Wary of mounting problems for Japan's economy, the BOJ has also nudged interest rates near zero.
Senior BOJ officials, including board member Atsushi Mizuno, has signalled that the central bank is ready to examine further steps to support the economy and ensure financial stability.
The Bank of Japan's top economist, Kazuo Monma, said Japanese prices may stay in a downtrend for the time being, adding that the central bank needed to monitor whether price falls and increasing slack in the economy may create a self-perpetuating spiral of price drops and further slowing in economic activity.
Monma also said adjustments in Japanese capital spending will gather pace from now -- a point highlighted by the fall in machinery orders.
Although the fall in December machinery orders was only one-fifth what the market expected, analysts took little positive from it, saying there were one-off factors in the steel sector that would not be sustained.
Japan's Nikkei average initially rose 1.3 percent on Monday, buoyed by exporters such as Honda Motor Co on a weaker yen and amid hopes for economic stimulus measures by the U.S. government to bolster the economy, although they gave up gains in late trade.
Core machinery orders, which exclude those for ships and machinery at electric power firms, fell 16.7 percent in October-December, the sharpest quarterly fall on record.
Many companies including Toyota Motor, which had been expanding production capacity to take advantage of robust growth in emerging markets until several months ago, has been forced to cut production in the face of unprecedented losses.
That has led to a sharp drop in industrial output. Data due next week is expected to show Japan's economy shrank at its fastest pace since 1974 in the final three months of 2008, according to a Reuters poll.
With much of the developed world seen contracting at least until the next quarter, many expect the Japanese economy to only start a slow recovery later this year.
"The economy may start growing in the latter half of this year but we can't expect it to achieve its potential growth rate, probably until the year after next," said Hiroshi Shiraishi, an economist at BNP Paribas.
"If the economy is still contracting later this year, it may be falling into a deflationary spiral." ($1=91.57 Yen) (Additional reporting by Leika Kihara and Yuzo Saeki, writing by Hideyuki Sano; Editing by Michael Watson)