WRAPUP 2-Japan machinery orders slide on economy doubts

* May core machinery orders -9.1 pct vs forecast -3.1 pct

* Govt says economic uncertainty increasing

* BOJ Shirakawa says markets showing signs of instability

* Govt maintains machinery orders are picking up
(Adds sentiment survey, GDP correlation calculation)

By Rie Ishiguro and Leika Kihara

TOKYO, July 8 (BestGrowthStock) – Japanese machinery orders tumbled
by the most in almost two years in May as companies grew more
cautious about the business outlook due to a rising yen and
signs of a global economic slowdown.

Bank lending in June also fell, matching the biggest annual
decline in almost five years, as demand from companies for
funds to invest in plants and equipment remained sluggish.

Bank of Japan Governor Masaaki Shirakawa stuck to the
central bank’s view that Japan’s economy was showing further
signs of a moderate recovery, but he and other market watchers
voiced concerns about the potential fallout from Europe’s debt
woes.

A senior government official said there was a risk Japan’s
economy may enter a lull, after service sector sentiment
worsened for two straight months in June.

“Europe’s financial problems haven’t had an impact yet, but
companies are applying the brakes now,” said Tetsuro Sawano, a
senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley
Securities in Tokyo.

“People are also worried about a slowdown in the United
States later this year.”

Core private-sector machinery orders, a highly volatile
series regarded as an indicator of capital spending, fell 9.1
percent in May, the biggest decline since August 2008 and far
more than the median market forecast for a 3.1 percent decline.
[JPMORD=ECI] (ECONJP: )
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on machinery orders: http://link.reuters.com/ref46m More stories on the Japanese economy [ID:nECONJP] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

BAD NEWS HEADING INTO ELECTION?

The decline in machinery orders could be a fresh warning
sign for the ruling Democratic Party as an upper house election
approaches on Sunday.

Public support for new Prime Minister Naoto Kan is slipping
as he struggles to convince voters that his party can repair
public finances with higher taxes and boost growth with its
economic policies. [ID:nTOE65M040]

Worries about Europe’s debt problems and the health of the
global recovery have helped push the yen up more than 5 percent
against the U.S. dollar this year as investors shun riskier
assets, which could hurt business sentiment, economists say.

The dollar stood around 88.30 yen (JPY=: ) on Thursday,
edging off a seven-month low of 86.96 yen hit at the start of
the month.

Machinery orders from manufacturers fell 13.5 percent in
May, faster than a 5.5 percent decline the previous month.

The effects of government stimulus measures for
energy-efficient electrical appliances have started to dwindle,
Keisuke Tsumura, parliamentary secretary of the Cabinet Office,
told a news conference, adding that the pace of recovery in
capital spending could be slower than anticipated.

Moves in gross domestic product (GDP) tend to lag moves in
machinery orders by one quarter. Over the past 10 years, GDP
had a correlation coefficient of 0.4 with machinery orders,
according to Reuters calculations. A coefficient of 1 means two
variables move in lockstep.

The mood among Japanese businesses turned positive for the
first time in two years and big firms revised up capital
spending plans due to a recovery in exports, a Bank of Japan
survey showed earlier this month. [ID:nTOE660003]

But the improvement in sentiment could slow as
manufacturing data from China and the United States suggests
that the global economic recovery may be losing some momentum,
economists say.

Weak global financial markets are also eroding consumer and
corporate sentiment.

Japan’s service sector sentiment index fell to 47.5 in June
from 47.7 in May, a Cabinet Office survey showed on Thursday.
The outlook index, indicating the level of confidence in future
conditions, fell to 48.3 from 48.7 in May. [ID:nTKU106122]

“There is a risk that Japan’s economy will enter a lull,”
Tsumura said after the sentiment survey was released.

Other data released on Thursday showed outstanding loans
held by Japanese banks fell 2.0 percent in June from a year
earlier, the same annual rate of decline as in May, indicating
companies remain reluctant to expand their activity.
[ID:nTKW007022]

In a speech to a meeting of the BOJ’s regional branch
managers, Shirakawa said Japan’s economy is expected to remain
on a recovery trend as capital spending was starting to pick
up.

But he also said export and output growth will gradually
slow and warned about recent financial market developments.

“Global financial markets are showing some signs of
instability due to worries about sovereign risk,” he said.

The government maintained its view that machinery orders
are picking up, reflecting improvement in service-sector
orders.

Core orders, which exclude those for ships and machinery at
electric power firms, rose 4.3 percent in May from a year
earlier, less than the median estimate for a 10.7 percent
rise.
(Editing by Kim Coghill)

WRAPUP 2-Japan machinery orders slide on economy doubts