* Core machinery orders +5.4 pct mth/mth vs f'cast +2.0 pct * Recovery in capex a key to success of "Abenomics" * Govt says machinery orders are picking up * Sluggish wages pose challenges for policymakers By Tetsushi Kajimoto TOKYO, Oct 10 Japan took another step forward to cementing a durable economic recovery, as core machinery orders rose in August to their highest level since the global financial crisis, a welcome sign for achieving sustainable growth. The 5.4 percent month-on-month rise in core orders, which exclude those for ships and electric power utilities, was the first rise in three months, data from the Cabinet Office showed on Thursday. The reading also beat economists' median forecast for a 2.0 percent gain, and followed a slight fall in July. The value of core orders reached 819 billion yen ($8.4 billion), the biggest since the Sept. 2008 collapse of U.S. investment bank Lehman Brothers triggered the global recession. The outcome is an encouraging sign for Prime Minister Shinzo Abe, who is hoping the positive mood generated by his reflationary policies, dubbed "Abenomics", will lead to a virtuous cycle of higher capital spending, growth in wages and private consumption. The government and the Bank of Japan see a recovery in capital spending as key in driving a sustained economic recovery and breaking 15 years of grinding deflation, paving the way for the ultimate success of Abe's policies. Growth so far this year suggests that the recovery in the world's third-largest economy is solidifying, although the jury is still out on whether capital spending is about to take a decisive turn for the better. Second quarter gross domestic product data last month showed capital spending rose 1.3 percent, marking the first increase in six quarters. "The (machinery) data confirmed a recovery in capital spending led by non-manufacturers, reflecting effects from Abenomics," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. Japan's economy expanded for the third straight quarter in April-June, outpacing other G7 nations with an annualised growth of 3.8 percent, as the government's aggressive policies bolstered household spending and drove down the yen, benefiting exports. Analysts expect companies to spend more on plant and equipment in coming months as the BOJ's key tankan survey earlier this month showed confidence among big manufacturers hit its highest in nearly six years in the third quarter. In another positive signal for the economy, Japanese consumer confidence rose for the first time in four months in September, a government survey showed on Thursday, reflecting improved views on incomes and jobs. SLUGGISH WAGES For years Japanese firms have been hoarding cash, instead of spending on plants and equipment or raising salaries, due in part to the view Japan would remain mired in deflation, bringing their total cash pile to some 220 trillion yen ($2.26 trillion). Despite signs of a recovery in capital spending, many firms remain reluctant to raise wages in defiance of Abe's call to boost salaries, casting doubts about the sustainability of the economy's recovery. Data showed this month wage earners' total cash earnings fell year-on-year for the second consecutive month in August, with regular pay down for 15 months in a row, a sign a sustained rise in wages is far from assured despite a rise in bonuses. Underlining tame cash demand among companies, Japanese bank lending grew just 2.0 percent in the year to September, separate data from the Bank of Japan showed on Thursday. The Cabinet Office raised its view on machinery orders, saying they are picking up, from its previous view it was increasing moderately. The BOJ, which offered an intense burst of monetary stimulus in April to achieve 2 percent inflation in two years, also revised up its assessment of capital expenditure on Friday to say it is picking up. The Cabinet Office data showed orders from manufacturers rose 0.8 percent, while orders from the services sector increased 6.2 percent, underscoring firm domestic private consumption. Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, grew 10.3 percent in August, above economists' median estimate of a 8.7 percent gain. Still, underscoring the challenges facing policymakers, some analysts remain doubtful that the positive momentum can be sustained, given companies' reluctance to raise wages. "This data is certainly positive for Abenomics but it just points to the beginning of the positive cycle and I doubt it can be sustained, given sluggish wages," said Naoki Iizuka, economist at Citigroup Global Markets Japan.