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* Jan core machinery orders +13.4 pct m/m vs f'cast +7.0 pct * Machinery orders rise at fastest pace since March 2013 * Data supports optimism about pickup in business investment * Capex seen as essential for faster economic growth By Stanley White TOKYO, March 13 (Reuters) - Japan's core machinery orders rose in January at the fastest pace in almost a year, rebounding from a record decline in the previous month, in a positive sign that long-dormant business investment will start to accelerate and contribute to the broader economy. The 13.4 percent month-on-month increase in orders - a leading indicator of capital expenditure - was faster than the median estimate by economists for a 7.0 percent rise, and supports the Bank of Japan's argument that business investment will quicken as domestic demand strengthens. The data could ease worries that Prime Minister Shinzo Abe's reflationary policies are running out of momentum and suggest the economy can recovery quickly after an increase in the sales tax next month. "Companies are more confident that the economic slowdown expected after the tax hike will be temporary and that earnings will continue to improve," said Shuji Tonouchi, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. "Capital expenditure will continue to recover gradually as the year progresses," he said. Orders from manufacturers rose 13.4 percent in January from the previous month, the Cabinet Office data showed on Thursday. Orders from the services sector rose 12.1 percent, showing that demand for business investment is spreading through all sectors of the economy. Compared with a year earlier, core orders, a highly volatile data series, increased 23.6 percent in January, more than the median estimate for an 18.8 percent annual increase. The BOJ upgraded its assessment of capital expenditure on Wednesday, encouraged by increased shipments of capital goods. Officials in the government and the central bank have said capital expenditure is essential to pull Japan out of deflation and boost growth, because investment in factories and equipment creates jobs, which can push up wages and support consumption Capital expenditure was weaker than expected last year as some companies doubted that a pick-up in domestic demand would last into this year. Now that consumers are buying more goods before an increase in the sales tax rate on April 1 and wages are rising, policymakers hope this will encourage companies to expand capacity to meet stronger consumer demand. Abe, who took office late in 2012, had initial success with fiscal stimulus spending and monetary easing, but some investors are starting to question whether Abe can carry out structural changes needed to ensure long-lasting economic growth.