TOKYO (Reuters) - Japan's core machinery orders, a key gauge of capital spending, fell for a second straight month in February in a sign of soft business investment that could challenge policymakers' efforts to shake off decades of economic malaise.

The 0.4 per cent monthly fall in core machinery orders, a highly volatile data series, came as a recent run of weak indicators raised doubts about a sustainable economic rebound following a recession last year.

The data released by the Cabinet Office on Monday compared with economists' median estimate of a 2.8 per cent decline and a fall of 1.7 per cent in January.

Policymakers are counting on higher capital spending driving a virtuous cycle of sustainable economic growth via increases in jobs and wages, and strong private consumption.

Machinery orders are regarded as an indicator of capital spending in the coming six to nine months, and the latest data will be seen as a sign of tepid business investment ahead.

Analysts say the decline in core orders was largely a reaction to a big gain in December, echoing the central bank's view that capital spending is on a gradual rising trend thanks to hefty corporate profits.

But weak capital spending plans for the new fiscal year that began on April 1, seen in the bank's key tankan survey, suggests that business investments may remain slow to recover from a slump after the sales tax hike last year.

The Cabinet Office stuck to its view that machinery orders are on a gradual pickup trend.

Compared with a year earlier, core orders, which exclude those of ships and electric power utilities, increased 5.9 per cent in February, versus a 3.7 per cent rise seen by economists, the data showed.

Prime Minister Shinzo Abe and the Bank of Japan are hoping companies will be willing to use a record cashpile for new investment, which is seen as crucial to reviving the economy and beating years of deflation.

However, despite Abe's call to splurge, Japanese firms - from Toyota Motor to Daikin Industries' - remain cautious about boosting new spending on factories and equipment.

Last week the BOJ kept its massive stimulus programme intact and shrugged off speculation of near-term fresh stimulus, even as inflation ground to a halt and growth stalled two years into its radical experiment to revive the economy.