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Japan Machinery Orders Tumble, BOJ Is Seen on Track

Japan's core private-sector machinery orders fell more than expected in June, signaling a slowdown in corporate capital spending ahead, but did little to alter market players' views that the Bank of Japan will raise rates this month.

Core orders, which exclude those for ships and machinery at electric power firms, fell 10.4% from May, their biggest monthly fall in nearly a year, government data showed. The consensus market forecast had been for a much more modest decline of 1.9%.

"The orders fell much more than expected and it was a bad result. But if you look at other surveys, such as the BOJ's tankan, capital spending is unlikely to falter. So it is premature to decide a change in the trend of capital spending by looking at this data alone," said Noriaki Haseyama, economist at Dai-Ichi Life Research Institute.

Financial markets showed little reaction to Wednesday's data as they focused on a U.S. Federal Reserve statement that inflation was still its main concern.

Manufacturers were upbeat about the outlook.

Those surveyed by the Cabinet Office forecast that core orders, a highly volatile series regarded as an indicator of capital spending in the coming six to nine months, would rise 3.7% in July-September from the previous quarter.

Core orders fell 2.4% in April-June, outperforming manufacturers' initial forecast of an 11.8% fall from the previous quarter.

Compared with a year earlier, core orders in June fell 17.9%, against a median forecast for a 9.9% drop. The data bore out the central bank's view that corporate capital spending would remain robust even though it will slow somewhat from last year, analysts said.

"The data is still in line with the BOJ's basic scenario. Given the current economic fundamentals, the BOJ could raise rates this month," Haseyama said.

Firm capital spending is seen to have helped the economy achieve its 10th straight quarter of expansion in the April-June quarter, although the pace of economic growth likely slowed to 0.2% from 0.8% in January-March, a Reuters poll showed.

Separate data from the BOJ showed that Japanese banks' outstanding loans rose 0.3% in July from a year earlier, increasing for the 18th straight month.

But the rise in bank loans was weak due to sluggish demand from big companies, which have ample cash on hand, said a BOJ official.

Lending by city banks, at minus 1.0%, was the biggest year-on-year fall since March 2006 when it dropped 1.4%.

Other data also showed that Japan's most widely watched measure of money supply -- M2 plus certificates of deposit -- in July grew 2.0% from a year earlier, compared with a consensus market forecast for a 1.9% expansion.

Many analysts expect the central bank to raise its key policy rate to 0.75% at its next policy meeting on Aug. 22-23, from the 0.5% it has held rates at since February.