Published: Monday, 10 Aug 2009 | 12:46 AM ET

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Japanese manufacturers forecast a sixth straight quarterly fall in machinery orders in July-September, suggesting they remain wary of expanding their production capacity despite signs of a global economic recovery.

CNBC.com

June data showed the biggest rise in more than a year, but the outlook figures suggest capital spending will not contribute much to overall economic growth in the foreseeable future.

With the outlook murky, the Bank of Japan will likely maintain its cautious view on the economy and keep interest rates near zero at least until early 2011, analysts say. No policy change is expected at the bank's two-day rate review that ends on Tuesday.

Manufacturers surveyed by the Cabinet Office forecast that core machinery orders, a highly volatile series seen as an indicator of capital spending in the coming six to nine months, would fall 8.6 percent in July-September from the previous quarter.

Core orders rose 9.7 percent in June, the first gain in four months and the biggest increase since April 2008, Cabinet Office data showed on Monday.

"Despite the rebound in machinery orders in June, manufacturers' forecast for an 8.6 percent fall in July-September suggests the overall trend in orders is still weak as the utilization rate at factories remains low and corporate profits remain at a low level despite their recovering trend," said Seiji Shiraishi, chief Japan economist at HSBC Securities.

In April-June, core private-sector machinery orders, which exclude those for ships and machinery at electric power firms, fell 4.9 percent from the previous three months.

The yen ticked slightly higher to 97.17 yen per dollar

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Ten-year JGB futures fell 0.25 point to 137.34.

The numbers suggest the Bank of Japan's view that the economy will improve from the latter half of this year may be a bit too rosy, said Junko Nishioka, chief Japan economist at RBS Securities.

"The stance on capital spending is very cautious due to the weak demand outlook, including foreign demand. I think the Bank of Japan's scenario is relatively positive compared with that of the private sector," she said.

"If final demand continues to be very weak and if it is difficult to see when companies will recover, then it will take a long time for the BOJ to seek an exit strategy, including normalizing interest rates. I think the bank will continue its loose policies for a while."

Japanese companies are expected to keep cutting back on capital expenditure to cope with weak demand both at home and abroad, after the global economy suffered its deepest slump in many decades.

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Although manufacturers have increased output steadily in recent months thanks to a recovery in exports, they are still running their factories at less than 70 percent of capacity.

The huge slack in the economy shows how little companies need to increase spending on equipment and also suggests they may have to continue cutting jobs to make profits.

Japan's economy is expected to have grown 1.0 percent in April-June after four straight quarters of contraction, a Reuters poll showed. But economists expect any recovery to be fragile as uncertainty over the global economic outlook keep companies and households from boosting spending.

Separate data released by the Bank of Japan showed bank lending rose 2.1 percent in July from a year earlier, slowing further from a record gain in January as credit conditions eased.

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