* Core machinery orders -2.1 pct m/m vs f'cast -1.4 pct
* Firms see Q4 core orders down 2.1 pct qtr/qtr
* Recovery in capex needed for sustained economic growth
* BOJ Miyao says somewhat more mindful of downside risks
* Adds Japan on track to meeting 2 pct price goal
(Adds BOJ Miyao's comments) TOKYO/MATSUMOTO, Japan, Nov 13 (Reuters) - Japan's core machinery orders fell more than expected and a central bank policymaker warned of headwinds from soft overseas growth, underscoring the challenges of sustaining an economic recovery generated by Prime Minister Shinzo Abe's stimulus policies. September's 2.1 percent fall in core machinery orders, a volatile series regarded as a leading indicator of capital expenditure, exceeded a median market forecast for a 1.4 percent drop and followed a 5.4 percent gain in August. Firms expect orders to fall further in the current quarter, the data showed on Wednesday, suggesting that business investment remains the weak link in keeping the economy afloat. Bank of Japan board member Ryuzo Miyao said he expects Japan's economy to sustain a moderate recovery as rising profits prompt firms to gradually increase capital spending. But he warned of looming uncertainties, such as slack growth in emerging economies and lingering U.S. fiscal problems that could delay a pick-up in global growth. "I'm somewhat more mindful of downside risks," Miyao told business leaders in Matsumoto, northwestern Japan on Wednesday. Sluggish capital spending is a source of concern for Abe, who needs a pick-up in business investment to help drive a sustained recovery in the economy after 15 years of deflation. Firms surveyed by the government forecast that core orders would fall 2.1 percent in the final three months of 2013, after two straight quarters of increases, the data showed. Still, the government stuck to its assessment that machinery orders are picking up, and analysts said capital spending still seemed on track for a gradual recovery. "Companies seem hesitant to boost capital spending due to uncertainty over overseas economies, and domestic conditions after a sales-tax hike next April," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. "As such, capital spending is on track for a recovery but it is unlikely to pick up the pace of recovery for the time being."
CONSUMER-DRIVEN RECOVERY Japan's economic growth has so far outpaced other G7 nations this year, as Abe's reflationary policies have boosted demand and weakened the yen, benefitting exports. Data due on Thursday is forecast to show growth likely slowed in July-September, but it is seen accelerating again as consumers spend up before the sales-tax increase in April. Policymakers are hoping that overseas demand will pick up in time to make up for a downturn in spending after the tax rises, although exports have lacked momentum on sluggish emerging market growth. BOJ's Miyao said that Japan's current economic recovery was largely driven by household spending, unlike past expansions led The strength in consumption is heightening labour productivity among non-manufacturers and will help accelerate inflation as companies feel more confident about passing along higher costs to consumers, Miyao said. "The recovery in personal consumption and non-manufacturers may broadly push up prices, as they affect a wide sector of the economy," he said. The BOJ has kept monetary policy on hold since offering an intense burst of stimulus in April, under which it pledged to accelerate inflation to 2 percent in roughly two years by doubling base money via aggressive asset purchases.
(Editing by John Mair and Richard Borsuk)