(Adds service sector survey, comments)
By Yuzo Saeki
TOKYO, March 10 (Reuters) - Japan’s core machinery orders posted their biggest rise in seven years in January and service sector sentiment improved, but Tokyo stocks fell 2 percent on Monday on growing fears of a U.S. recession.
A recession in America could drag Japan into one as well, some analysts say, with investors pricing in a roughly 60 percent of a Japanese rate cut by January next year. JPONIBOJ=TRDT
Core private-sector machinery orders, a highly volatile series seen as an indicator of capital spending in the coming six to nine months, jumped 19.6 percent in January, almost seven times as much as expected. [JPMORD=ECI]
But many economists said the big rise was likely a one-off fuelled by railway car orders, and the coming months would see a retreat. [ID:nT17328]
“The outlook for the global economy remains uncertain,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“It’s possible that machinery orders figures could drop in February and March following the expectedly large increase in January.”
The data comes amid political wrangling over candidates to head the Bank of Japan, which some warn could rock already unstable financial markets if it is not resolved ahead of Governor Toshihiko Fukui’s retirement in the middle of next week.
Prime Minister Yasuo Fukuda said on Monday the government had no plans to put forward a different candidate for the next central bank chief, despite resistance from opposition parties towards nominee Toshiro Muto. [ID:nT200184]
Despite the strong machinery orders data, Tokyo share prices followed Wall Street lower after weak jobs figures that fuelled talk that the U.S. economy could already be in recession.
The Nikkei share average .N225 set its lowest close in 2-½ years [.T], while the dollar slipped back towards a record low against the euro and an eight-year low versus the yen [FRX/].
Despite the surge by the yen and the economy’s reliance on exports, there has been little talk of Japanese intervention to try to cap its rise, unlike in past years when the currency has reached such levels.
“I don’t think we will call for intervention for a while, as long as exchange rates stay around present levels,” Fujio Mitarai, chairman of top business lobby the Japan Business Federation, told reporters.
The rise in core machinery orders was due mainly to orders from the steel and transport sectors such as for railway cars, a Cabinet Office official said. [ID:nT238224]
While economists warned of future weakness, the jump in machinery orders eased some concerns that rising raw material costs were hurting corporate spending.
“Although machinery orders are likely to be moderate in the first quarter, the data suggests that capital spending may not suffer such a big drop as some had feared,” said Junko Nishioka, Japan economist at ABN Amro.
Corporate sector strength has been a major engine of Japan’s economic growth but recent data has suggested that it may be losing steam.
A Ministry of Finance survey showed last week that corporate capital spending fell 7.7 percent in October-December from a year earlier, marking the largest annual drop in five years.
Economists now expect Japanese economic growth in the last quarter of 2007 to be revised down to 0.6 percent from a preliminary 0.9 percent expansion, according to a Reuters poll. [ID:nT248831] Revised growth figures are due out at 8:50 a.m. on Wednesday (2350 GMT Tuesday).
In another positive sign, however, a government survey showed on Monday that sentiment among service sector workers, called “economy watchers” for their proximity to consumer and retail trends, improved for the first time in 11 months in February.
The improvement was partly due to firm demand for home-grown fresh food, reflecting public concern about the safety of imported food, the survey showed. [ID:nTKG002963].
Mounting pessimism over Japan’s economic outlook has reinforced views that the BOJ will keep interest rates steady at 0.5 percent or even cut them this year.
The BOJ cut its assessment of the economy in a monthly report on Friday, saying growth was slowing due to a domestic housing slump and high energy and raw materials prices.
But the central bank remained upbeat about the outlook for the global economy and Japanese exports.
While the U.S. economy was showing increasing signs of a slowdown, China and other emerging economies continued to enjoy firm growth and global demand for electronic goods is expected to continue rising, the BOJ said in the full text of its monthly report, released on Monday.
BOJ data showed on Monday that the balance of outstanding loans held by most Japanese banks rose 0.8 percent in February from a year earlier, the highest annual increase since last May. (Additional reporting by Leika Kihara, Tetsushi Kajimoto and Yoko Nishikawa; Editing by Michael Watson)