UPDATE 3-Japan machinery orders weak, any recovery seen slow

(For more stories on the Japanese economy, click [ID:nECONJP])

* Lumbered with spare capacity, firms not seen investing

* Some signs of optimism among manufacturers

* Wholesale price slide speeds up, deflation pressure rising

* BOJ governor sees GDP rebound in Q2 but cautious of outlook

By Leika Kihara

TOKYO, June 10 (Reuters) - Japan's core private-sector machinery orders slid unexpectedly in April, suggesting firms are not confident that a bounce in industrial output and exports will be sustained enough to resume capital investment.

Despite growing signs that the worst of the global economic crisis may be over, core orders are still running one-third lower than a year earlier and April's 5.4 percent slide provides further evidence that any economic recovery will be slow.

Adding to deflationary pressures, a 5.4 percent tumble in wholesale prices in the year to May -- the biggest annual fall in 22 years -- showed weak demand was increasingly a problem.

But the data was not completely downbeat, with an improvement in orders from electronic machinery and auto makers offering signs that some sectors were becoming less pessimistic.

"The orders data doesn't undermine the view that Japan's economy has bottomed out and exports are showing signs of recovery," said Chotaro Morita, chief fixed-income strategist for Barclays Capital in Japan.

"But given that capital spending will likely remain low due to oversupply and a cautious corporate outlook for investment, the orders data suggests that the economic cycle of exports leading to production, spurring investment and consumption may be weaker this time than usual."

The decline in April from March was the second straight month of falls and the figure was weaker than a median market forecast for a 0.4 percent rise. The series is a very volatile leading indicator of capital spending. Core orders exclude ships and utility purchases. [JPMORD=ECI]

For a graphic of machinery orders and output click: here

Japanese factories are running at just over 60 percent of production capacity, compared with levels above 100 percent before the collapse of U.S. investment bank Lehman Brothers jolted global financial markets in September.

NON-MANUFACTURERS GLOOMY

April orders for manufacturers tumbled 9.4 percent, though that was largely due to drops in orders from sectors that logged big gains in March such as general machinery and chemical makers.

"The headline numbers are weak for April, but in terms of the outlook there are signs of improvement in electronic machinery and also, although still small, in motor vehicles," said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute.

"The outlook should improve gradually from May."

Non-manufacturers were more gloomy, with firms in the transport, telecoms and finance sectors ordering less equipment, further evidence that damage from the recession was broadening.

Tokyo stocks shrugged off the weak data, with the Nikkei average .N225 hitting an eight-month closing high on hopes for a global economic recovery. Shares in Komatsu Ltd (6301.T), the world's second-largest maker of earth-moving equipment, also rose despite the data.

While global policymakers have suggested the bottom of the economic crisis has passed, analysts say recovery signs are tentative and no one is forecasting a strong rebound.

Revised data on Thursday is expected to show Japan's economy shrank 4.0 percent in the first quarter, the biggest contraction since World War Two.

Analysts expect it to grow 0.5 percent in the current quarter for the first rise in gross domestic product after four straight quarters of contraction. [ID:nT320607]

Bank of Japan Governor Masaaki Shirakawa said he expects industrial output and GDP to improve in April-June as manufacturers have reduced inventories, but added that domestic demand will remain weak as companies shed jobs. [ID:nTKU105407]

The central bank's chief economist, Kazuo Monma, said on Wednesday it is too early to conclude that Japan's economy has hit bottom. [ID:nTKX006299]

Falling commodity prices continued to push down wholesale prices, but declines in final goods prices showed weak domestic demand was also playing a part.

Final domestic goods prices fell 2.1 percent in the year to April, pointing to further pressure on consumer prices, which have entered their second bout of deflation this decade.

Core consumer prices started falling in the year to March, and both the Bank of Japan and economists expect at least two years of deflation. But opinions are divided about whether this will be mild or a more serious slide that prompts consumers to curb spending. (Additional reporting by Hideyuki Sano; Editing by Michael Watson)