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UPDATE 1-Japan machinery orders fall most in 8 months in worrying sign of capex slowdown

sector, core orders from manufacturers fell 7.4% in May

capex slowdown@ (Adds detail, context on economic policy)

* May core orders -7.8% mth/mth vs forecast -4.7%

* Core orders -3.7% yr/yr in May vs forecast -3.9%

* Capex had been seen as bright spot in economy

* External risks may weigh on capex ahead

TOKYO, July 8 (Reuters) - Japan's core machinery orders fell for the first time in four months in May, posing the biggest monthly drop in eight months in a worrying sign that global trade tensions are taking a toll on corporate investment. Cabinet Office data on Monday showed that core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, fell 7.8% in May from the previous month. The reading, the biggest drop since September 2018, compared with a 4.7% decline seen by economists in a Reuters poll and followed a 5.2% rise in April. Declines in capital expenditure could worry policymakers who count on domestic demand to offset risks such as the Sino-U.S. trade war and slowing global demand that could threaten to derail the world's third-largest economy. Capital expenditure has been a bright spot in the fragile economy, helping first-quarter gross domestic product to expand at an annualized rate of 2.2%. However, external risks cloud the outlook for Japan's export-dependent economy, which would weigh on Japanese business confidence and could in turn put a drag on capital expenditure. That could fan concerns about domestic demand just as Prime Minister Shinzo Abe's government is set to raise the national sales tax to 10% in October. The previous tax hike to 8% from 5% in April 2014 dealt a blow to consumers and triggered a deep economic slump. Since then, Abe has twice delayed a planned sales tax hike. The Cabinet Office maintained its assessment on machinery orders to say they are showing a pick up. from the previous month, swinging sharply lower from the prior month's 16.3% gain, while those from the service-sector dropped 9.0%, down for the first time in three month, the Cabinet Office data showed. Compared with a year earlier, core orders, which exclude those of ships and electricity, declined 3.7% in May, it showed.

(Reporting by Tetsushi Kajimoto Editing by Jacqueline Wong)

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