"The figures were very weak. Machinery makers are getting cautious about the outlook as companies' earnings are weakening and uncertainty on the world's economy is growing," said Hiroshi Shiraishi, economist at Lehman Brothers.
The soft data briefly trimmed losses in Japanese government bond futures, as it reinforced expectations of a deteriorating economy, but the bonds turned tail and fell again as bullishness in global stocks pushed Japanese shares to a four-month high.
Core private-sector machinery orders, which exclude those for ships and machinery at electric power firms, fell 8.3 percent in March, more than economists' media forecast for a 5.5 percent drop, the Cabinet Office said.
That took them to 956.8 billion yen ($9.1 billion) for the month, the smallest tally since May 2005.
It was the second big monthly fall in a row in the volatile figures, and prompted the government to downgrade its assessment on machinery orders to "somewhat weak" from a previously neutral stance.
The BOJ also expects Japan's capital spending -- which has been a key engine of Japanese growth -- to slow after a few years of strong corporate investment, as companies are squeezed by rising energy and raw material costs.
"The latest data underscores the Bank of Japan's reference to downside risks to the economy," said Takeshi Minami, chief economist at Norinchukin Research Institute. "If capital investment actually slows down considerably in the April-June quarter, the possibility of a rate cut may rise somewhat, although such a chance is slim for now."
Manufacturers forecast orders, an indicator of capital spending in the coming six to nine months, would fall 10.3 percent in the second quarter.
However, some played down the significance of the outlook figure, saying companies tend to make overly cautious forecasts at the beginning of their new financial year in April.
Takumi Tsunoda, senior economist at Shinkin Central Bank Research, said actual orders have turned out an average 9 percent more than the forecast in the past five years.
Growth in the world's No.2 economy is likely to have slowed to 0.6 percent in the first quarter of this year from 0.9 percent growth in October-December, a Reuters poll showed.
But the expected annualized growth rate of 2.5 percent for the quarter would be much higher than Japan's potential growth rate, which the BOJ says is around 1.5 percent now.
Economists blamed a likely fall in capital spending for slowing growth in the January-March, although they said solid exports to booming emerging economies and firm consumption probably underpinned growth. January-March gross domestic product data is due out at 8:50 a.m. Tokyo time on Friday.
The BOJ is expected to sit tight on monetary policy when its policy board meets next on Monday and Tuesday. At its last meeting in late April, the BOJ gave up a two-year bias towards raising rates and stressed downside risks.
But the BOJ also thinks Japan's policy is already very accommodative, with its key interest rate at 0.5 percent, well below consumer inflation of 1.2 percent a year.
Market players expect the BOJ to stand pat for a while before eventually raising interest rates, as the economy recovers.
Swap contracts on the overnight call rate show investors see a roughly 55 percent chance of the BOJ boosting rates by the end of the year, up from about 35 percent earlier this week.
The orders fell a revised 12.3 percent in February, after a 17.3 percent jump in January on huge orders for railway cars.