By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's core machinery orders fell sharply in February, casting doubt on the strength of capital spending as early signs suggest the world's third-biggest economy may struggle to cope with a sales tax hike that kicked in this month.
Core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, declined 8.8 percent, Cabinet Office showed on Thursday.
The fall followed a 13.4 percent jump in January, which was the quickest gain since March 2013, but was much worse than the 3.0 percent drop forecast by analysts in a Reuters poll.
The data joins a recent run of weak economic reports that showed a loss of economic momentum after a solid performance in the first half of last year, which was fuelled by Tokyo's aggressive monetary and fiscal stimulus policies.
However, capital spending, private consumption and exports have lagged recently as the effects of Prime Minister Shinzo Abe's policies began to fade, raising pressure on the Bank of Japan to provide additional stimulus.
There is also growing concern among analysts that a chill in demand from an increase in the sales tax to 8 percent from 5 percent on April 1 will severely crimp growth.
"Companies remain wary of business conditions after the sales tax hike, so growth in capital spending is unlikely to pick up pace at least until this summer when the situation may become clearer," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo.
"Capital spending may underpin the economy but I doubt it could be strong enough to serve as a key drive," he said.
Governor Haruhiko Kuroda dismissed market expectations on Tuesday that the BOJ could ease again soon. The central bank has kept policy steady since last April when it embarked on an unprecedented monetary stimulus.
However, the latest data won't be taken lightly by policymakers.
Indeed, the Cabinet Office cut its assessment of machinery orders, saying the increasing trend is seen stalling, indicating a challenging outlook. Previously, it had said machinery orders were increasing as a trend.
Capital spending has been a weak link in the world's third largest economy as many firms hoard cash and refrain from boosting spending on plants and equipment. They have also been reluctant to raise wages substantially due to the gloomy economic outlook.
The BOJ's tankan showed big firms expect to raise capital spending by just 0.1 percent in the current fiscal year, against a 0.2 percent rise seen by economists and a 3.9 percent gain in planned spending for the fiscal year that ended in March.
In February, orders from manufacturers and the service sector fell 11.9 percent and 8.4 percent respectively from the previous month, the Cabinet Office data showed.
Compared with a year earlier, core orders, which exclude those of ships and electric power utilities, grew 10.8 percent in February, versus a 17.6 percent rise seen by analysts.
Analysts expect the economy to contract in April-June due to a pullback in consumption after the tax hike, before returning to moderate growth in following quarters.
(Reporting by Tetsushi Kajimoto; Editing by Shri Navaratnam)