Japan's core machinery orders fell more than expected in December, suggesting that corporate activity is feeling the pinch from slowing U.S. growth. But manufacturers still forecast that core orders, regarded as a leading indicator of capital spending, would rise in January-March from the previous quarter.
The data did little to alter market views that the Bank of Japan's next move might be to cut interest rates from an already low 0.5 percent on fears that a U.S. recession could take a toll on Japan's economy.
Economics Minister Hiroko Ota said there was no need for pessimism because machinery orders rose in the October-December quarter and were forecast to rise again in the current quarter, and economists echoed this view.
"Machinery orders were a little bit softer than expected but still up on the quarter, which is two quarters in a row of increase," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan.
"But looking at the longer-term trend, basically machinery orders have been pretty much flat over the past year. It looks like capex growth doesn't really have the momentum to drive growth. We cannot expect much on this front."
Japanese government bond 10-year futures fell 0.34 point to 137.50 after a slide in U.S. Treasuries overnight, but the weak machinery orders data tempered the losses somewhat, analysts said.
Core private-sector machinery orders, a highly volatile series regarded as an indicator of capital spending in the coming six to nine months, fell 3.2 percent in December from the previous month.
That compared with economists' consensus forecast for a 0.9 percent drop and followed a 2.8 percent fall in November.
Manufacturers surveyed by the Cabinet Office forecast that core orders will show a 3.5 percent rise in January-March from the previous quarter. In October-December, the orders increased 0.9 percent.
"There are two main reasons behind the firmness in (quarterly) machinery orders -- for the mid- to long term, companies expect high growth and they have ample cash flows thanks to business restructuring in the past," said Naoki Iizuka, senior economist at Mizuho Securities.
Separate data on Friday showed that Japanese bank lending rose 0.4 percent in January from a year earlier, with the pace of growth picking up from a 0.1 percent rise in December, according to the Bank of Japan.
The most widely watched measure of money supply -- M2 plus certificates of deposit -- rose 2.1 percent in January from a year earlier, in line with economists' consensus forecast, other BOJ data showed.
Most economists expect Japan's economy to avoid slipping into a recession, given Japanese investors' limited exposure to U.S. subprime-mortgage-related products and strong growth in neighbouring countries such as China.
But fears of a U.S. recession are threatening the BOJ's scenario, which is for strength in corporate activity to filter through to households and boost private consumption.
The BOJ has kept rates on hold since it raised them by a quarter percentage point from 0.25 percent in February last year.