UPDATE 2-Japan machinery orders slump but BOJ seen on hold

* May machinery orders drop 14.8 pct vs f'cast 3.3 pct fall
* Current account surplus shrinks 62.6 pct yr/yr in May
* Europe crisis, slowing growth in China cloud outlook
* BOJ seen on hold this week, case for easing may strengthen

By Leika Kihara
TOKYO, July 9 (Reuters) - Japan's core machinery orders fell
at a record pace in May in a sign that companies are feeling the
pain from slowing global demand, but the data is not likely to
be alarming enough to nudge the central bank into loosening
monetary policy this week.
Core machinery orders, which help to gauge the strength of
capital spending, fell 14.8 percent in May, data showed on
Monday, much worse than a median forecast for a 3.3 percent drop
and the biggest decline since comparable data became available
in April 2005.
The government warned against reading too much into the
highly volatile data series, saying the drop was exaggerated by
seasonal factors and mostly a reaction to the previous month's
rise, which was inflated by big, one-off orders from chemical
and machinery makers.
But the weaker-than-expected data suggests that any recovery
in Japan's economy will be modest as Europe's debt crisis and
slowing growth in big markets such as China could make companies
less willing to increase capital spending.
"External demand looks weak. A lot of companies have turned
cautious about overseas economies," said Hiroaki Muto, senior
economist at Sumitomo Mitsui Asset Management in Tokyo.
"The global economy is weaker than we thought."

Weak U.S. payrolls data last week underscored the fragile
state of the world's largest economy, while deepening pain from
the euro-zone debt crisis drove the European Central Bank to cut
interest rates and the Bank of England to expand its
quantitative easing programme.
China, the main driver of world growth, also surprised
markets with a rate cut last week and will publish
second-quarter GDP data this week that is widely expected to be
the worst in at least three years.
The Bank of Japan, however, is expected to hold off on
easing monetary policy at its two-day meeting that ends on
Thursday, convinced that its stimulus steps in February and
April are enough to keep the Japanese economy afloat for now.

OUTLOOK DARKENING
While many Japanese central bankers are worried about the
outlook, they do not see enough evidence that Japan's recovery
is under severe threat and thus prefer to save their limited
options especially with the yen off its record highs.
"Public spending and personal consumption are driving the
Japanese economy but economic growth is likely to slow after the
summer, partly as government subsidies for low-emission cars run
out of money," said Yasuo Yamamoto, senior economist at Mizuho
Research Institute in Tokyo.
"The BOJ is likely to sit tight this week given the current
yen movements, but it could ease policy further as early as
September if it becomes clearer that the economy is slowing."
Japan's economy is expected to outperform most of its G7
peers this year with growth around 2 percent, as solid private
consumption and spending to rebuild from last year's earthquake
offset slowing global demand.
The BOJ upgraded its assessment for all nine regions of the
economy last week, while its closely watched tankan quarterly
survey for June showed big manufacturers' sentiment improved for
the first time in three quarters and companies planned increases
in capital expenditure.
But machinery orders in May fell for both manufacturers and
service sector firms, suggesting that corporate investment may
not turn out as strong as the tankan survey suggested.
Big Japanese consumer electronics makers, for one, are in no
mood to boost capital spending as they confront the global
slowdown and stiff price competition.
Sony Corp plans to cut capital spending by 29
percent in the year to March 2013 and Panasonic Corp by
27 percent, after incurring huge losses in their TV
manufacturing businesses.
Automakers, whose sales grew for 10 months in a row to June
on tax incentives for purchases of fuel-efficient cars, are also
cautious about the outlook as money set aside for the programme
is expected to run out in the next month or two.
They have boosted factory output to meet strong demand but
are looking to export more from their North American operations
instead of shipping vehicles from Japan, where a strong yen
undermines profits.
Toyota Motor has said it wants to reduce its
exports out of Japan, now around 1.7 million vehicles a year, to
1.5 million to escape currency losses.
Rising energy costs also continued to undercut Japan's
ability to earn money from abroad. Separate data showed Japan's
current account surplus slumped by 62.6 percent in May from the
same period a year earlier, faster than the median estimate for
a 14.5 percent decline, due to rising energy imports.