* March core machinery orders +2.9 pct vs forecast -9.6 pct
* Manufacturers expect orders to rise in Q2 - govt
* April wholesale prices +2.5 pct yr/yr vs forecast +2.1 pct (Repeats to restore text)
By Stanley White and Tetsushi Kajimoto
TOKYO, May 16 (Reuters) - Japan's core machinery orders unexpectedly rose in March and manufacturers expect further gains in the second quarter, counting on demand related to reconstruction from the March 11 earthquake.
Analysts had expected domestic private sector orders to fall following a slump in industrial output in March and some warned capital spending could dip again in the near term, given manufacturers' problems with getting production back to pre-quake levels.
Japanese companies are also grappling with rising fuel and commodity costs and wholesale prices in April rose at their fastest annual rate in 2-1/2 years, government data showed on Monday.
Despite companies' optimistic forecasts, economists said uncertainty over when the government will release the next batch of funds for reconstruction clouded the outlook.
"Orders from non-manufacturers, such as the telecommunications industry, appear strong. Orders for equipment to fix damage from the quake may be coming in," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"If demand related to quake reconstruction picks up, companies may feel more willing to boost investment. But much depends on when the government can compile its second extra budget to fund spending, which is highly uncertain."
On Monday, Prime Minister Naoto Kan signalled the next extra budget may have to wait until August or later, saying it would be based on plans prepared by regional authorities in the quake-hit areas. [ID:nL4E7GG0BE]
Core machinery orders rose 2.9 percent in March from the previous month, Cabinet Office data showed, against the median estimate for a 9.6 percent fall and following a revised 1.9 percent decline in February. The rise was led by brisk demand for electronics such as semiconductor production equipment.
Foreign orders, which are excluded from the core measure, jumped 21.5 percent in January-March, compared with a 3.5 percent rise in core orders during the same quarter.
Manufacturers surveyed by the Cabinet Office have forecast that core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, will grow 10 percent in April-June from the previous quarter.
But the government sought to tone down the overall message.
"Reconstruction demand may arise but companies may shelve some capital spending plans because of the quake, so we'd better be cautious about the outlook," a government official presenting the data said.
Financial markets shrugged off the orders data given that economists still expect the economy, hobbled by supply-chain bottlenecks, to shrink in the first half of this year. The 10-year Japanese government bond yield fell below 1.110 percent to a 5 1/2-month low.
However, signs that overseas demand was holding up made some analysts expect a healthy pick up in capital spending in the second half of the year.
"Few companies are expected to cut their long-term spending plans sharply because the disaster has so far sparked only supply constraints but not a steep pullback in demand," said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.
Wholesale prices rose 2.5 percent in the year to April, Bank of Japan data showed on Monday, accelerating for a fifth straight month on higher commodity prices.
The rise in the corporate goods price index (CGPI), which measures the prices that companies charge each other for their goods and services, exceeded a median forecast for a 2.1 percent increase and was the biggest gain since October 2008.
Japan is facing its worst crisis since World War Two after a 9.0 magnitude earthquake and a deadly tsunami battered its northeast coast on March 11, leaving about 25,000 dead or missing and crippling a nuclear plant to trigger the worst nuclear crisis since Chernobyl.
The world's third-largest economy is set to log three straight quarters of contraction at the end of June, marking a return to recession amid a slump in factory output, depressed business confidence and weak household spending after the disaster, a Reuters poll showed. [ID:nTOE749001]
Data issued last month showed both industrial output and household spending posted record declines -- 15.3 percent and 8.5 percent respectively -- in March, much worse than expected, although manufacturers expect output to rise in April and May. (Writing by Leika Kihara and Tetsushi Kajimoto; Editing by Tomasz Janowski)