By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's core machinery orders tumbled the most in over a year, adding to fears of an economic contraction in the second quarter as exports slumped and consumer spending slackened.
The 7.9 percent fall in the key gauge of capital spending followed a recent run of soft indicators - including exports and factory output - which led analysts to forecast a second-quarter contraction when economic growth figures come out on Aug 17.
Policymakers see little chance of a return to recession, expecting the economy to stay on track for a moderate growth in the current quarter.
Weak data though could raise doubts about the economic outlook in the face of China's slowdown, adding yet more pressure on the Bank of Japan to trim its rosy projections and prompting calls for fresh stimulus to support expansion.
"There's a risk that overseas slowdown could hit exports harder, prompting Japanese firms to put off investment plans. But so far I don't see that happening yet," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
He added that automation of Japanese factories in China and steady U.S. growth have helped increase overseas demand for machinery, with orders jumping 20.3 percent in June helped by big items. Overseas orders are not counted as core orders.
Companies surveyed by the Cabinet Office forecast that core machinery orders, a highly volatile data series seen as an indicator of capital spending in the coming six to nine months, will rise 0.3 percent in July-September, slowing from the second quarter.
Core orders, which exclude those of ships and electric power utilities, grew 2.9 percent in April-June from the prior three months, which was the fourth straight quarterly gain.
"June's decline was due to a big drop in manufacturers' orders, which came as reaction to gains in the prior month in sectors such as steel," said a Cabinet Office official, suggesting that the monthly decline may be a one-off.
Recent signs indicate that firms may finally be shaking off their deflationary mindset, in which they hoarded cash long-term rather than investing in plant and equipment.
The BOJ's quarterly tankan business sentiment survey on July 1 showed that big Japanese firms plan to boost capital spending in the fiscal year to next March at the fastest pace in a decade.
A Reuters poll also showed two in five Japanese firms plan to boost capital spending this business year.