Japan's core machinery orders tumbled twice as much as expected in July in a sign that companies are delaying investment due to worries about the strong yen, faltering global growth and slow progress in rebuilding from the March earthquake and tsunami.
The data is the latest in a series of disappointing figures, including July exports and output, that cast doubt on the strength of Japan's recovery from its post-quake slump.
The report could put pressure on the government and the Bank of Japan for action to prevent additional yen rises by intervening in the market and further easing monetary policy. Many market players expect the BoJ to ease monetary policy next month with the most likely trigger a renewed spike in the yen that would hurt the export-reliant economy.
The brisk pace at which Japanese companies restored supply chains and production that had been disrupted by the March 11 disaster convinced economists that the world's third-largest economy would resume growth this quarter, expanding at the fastest rate among major developed nations.
"Monthly data suggest the economy has already seen a V-shaped recovery and is likely to see only flat growth or even deceleration from the autumn and there is an emerging risk of a contraction in the fourth quarter," said Taro Saito, senior economist at NLI Research Institute.
Core machinery orders, a leading indicator for corporate capital spending, fell 8.2 percent in July from the previous month, Cabinet Office data showed on Thursday. That compared with a median market forecast for a 4.1 percent decline and follows a 7.7 percent rise in June.
Separate data showed the current account surplus fell more than expected in the year to July as exports weakened. A service sector sentiment index, also published on Thursday, fell for the first time in five months in another sign that the yen's strength and recession fears were sapping business confidence.
Sumco Corp, the world's No 2 supplier of silicon wafers used to make chips, on Wednesday slashed its annual operating profit forecast by 37 percent on weak PC demand and slower-than-expected growth in smartphones and tablet PCs, and said the fragile economy could dampen demand further.
Adding to pressure on exporters, the yen has been attracting safe-haven demand from investors unsettled by Europe's debt crisis and the US economic slowdown, even as Japan struggles with its own debt burden and its new government faces a battle to win a consensus over how to fund its biggest rebuilding effort since the years after the World War Two. The currency has stabilised in the past few days below record highs hit in mid-August, allowing the central bank to keep its policy on hold on Wednesday after it eased in August.
The BoJ stuck to its view that the economy would resume moderate growth from the next quarter, but highlighted risks posed by the yen and growing uncertainty about the health of the European and US economies. Economics Minister Motohisa Furukawa said the yen had risen to levels much higher than assumed by companies, potentially hurting corporate profits and prompting companies to relocate overseas.