Surprise slide in Japan machinery orders ramps up pressure on Bank of Japan

TOKYO (REUTERS) - Japanese machinery orders unexpectedly fell for a second straight month in July, ratcheting up pressure on the Bank of Japan to offer fresh stimulus, perhaps as early as next month, to re-energise an economy struggling to recover from a slump.

A string of soft data in recent weeks has raised questions about the BOJ's economic optimism, especially as fears of a deepening slowdown in Japan's major trading partner China has rattled global financial markets.

Core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, fell 3.6 per cent in July, the Cabinet office data showed on Thursday.

That followed a 7.9 per cent month-on-month decline in June and were far worse than a 3.7 per cent increase expected by economists.

"While uncertainty remains high about China and global economy, poor orders, particularly at the service sector, reflect persistent weakness in domestic demand," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The BOJ may ease policy further in October, but additional easing would not be enough to achieve its inflation target."

Many analysts cast doubt on the BOJ's optimism that a steady economic recovery will help bring inflation to its 2 per cent goal by around September 2016.

Not helping the BOJ's cause is a perceived reluctance by Prime Minister Shinzo Abe to embark on bolder reforms needed for durable growth.

As exports falter and the China gloom saps global growth, the BOJ is expected to offer a bleaker assessment on overseas economies at next week's policy review, but many in the bank prefer to hold off on expanding stimulus for now.

Earlier on Thursday, BOJ Governor Haruhiko Kuroda said timing for hitting inflation goal would vary depending on oil price moves.

Worryingly, the Cabinet Office cut its assessment of core orders, saying a pickup is seen stalling.

A Reuters poll showed in July that two in five Japanese firms plan to boost capital spending this business year.

Policymakers have been hoping that companies will use hefty profits gained from a weak yen and lower fuel costs to boost wages and investment, generating a positive cycle of rising income and higher spending.

However, that scenario has yet to play out amid sluggish capital spending, persistent weakness in private consumption and soft exports.

Analysts cut Japan's growth forecast to an annualised 1.67 per cent in the current quarter, after a 1.2 per cent contraction in April-June. The economy is expected to expand just 1.11 per cent in the current fiscal year.