Japan's core machinery orders rose in March, surprising markets which braced for a drop, and manufacturers forecast further gains in the second quarter, counting on demand generated by reconstruction from the March 11 earthquake.
Analysts had expected a weak number after a slump in industrial output in March and some warned capital spending could dip again, given manufacturers' problems with getting production back to pre-quake levels.
Japanese companies are also grappling with rising commodity costs and poor consumer sentiment. Wholesale prices rose in April at their fastest annual rate in 2-1/2 years while consumer confidence suffered a record fall, official data showed on Monday.
Economists pointed out that companies' optimistic forecasts were largely linked to government efforts to rebuild the quake-hit areas and the uncertainty over when it will release the next batch of funds for reconstruction clouded the outlook.
"If demand related to quake reconstruction picks up, companies may feel more willing to boost investment," said Takeshi Minami, chief economist at Norinchukin Research Institute. "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 signaled 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.
Core domestic private sector machinery orders rose 2.9 percent in March from the previous month 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 was more cautious.
"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 to shrink in the first half of this year as companies continue to struggle with supply bottlenecks.
However, signs that overseas demand was holding up made some analysts predict a bounce 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, accelerating for a fifth straight month on higher commodity prices.
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, sliding back into recession, a Reuters poll showed.
In a separate survey by Japan's Economic Planning Association economists cut their growth forecast for the fiscal year to March 2012 to 0.3 percent from nearly 1 percent following much worse than expected March output and household spending data.
The numbers published last month showed industrial production and household spending posted record declines, sliding 15.3 percent and 8.5 percent respectively.
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