Japanese machinery orders and wholesale prices data on Wednesday were weaker than expected, prodding authorities closer to fresh action to support an already fragile economic recovery.
Market speculation that the Bank of Japan will have to relax its already loose monetary policy has increased as policymakers raised alarm bells over a rise in the yen toward a 15-year high against the dollar.
But this week the Bank of Japan avoided fresh policy action and maintained its view that risks to the economy were balanced, while the U.S. Federal Reserve took a step to support the faltering U.S. recovery, a move analysts say will increase the allure of the yen against the dollar.
If the yen continues to stay on a firm trend and has a negative impact on the economy, the authorities will have to do something, said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
Data showed that core private-sector machinery orders, a highly volatile series regarded as an indicator of capital spending, rose 1.6 percent in June, much less than a forecast for a 5.5 percent increase.
Manufacturers surveyed in the data from the Cabinet Office forecast that core orders, which exclude those for ships and machinery at electric power firms, will rise just 0.8 percent in the July-September quarter over the previous quarter.
Orders rose in April-June by 0.3 percent.
Other figures showed wholesale prices fell 0.1 percent in the year to July, against a forecast for a 0.1 percent rise and underlining the stubborn deflation plaguing the country. Consumer prices have fallen from a year earlier for 16 straight months.
Many companies just don't expect Japan's economic growth to accelerate rapidly, so it's difficult for the corporate sector to boost spending, said Kiichi Murashima, economist at Citigroup Global Markets in Tokyo.
The BOJ has made it clear that they would need to see a lot more evidence of weaker growth before they would consider a move. The ruling Democratic Party is preoccupied with the election ... so it's difficult to expect a firm policy response.
There are growing worries among policymakers that the global recovery is stumbling following signs of an economic slowdown in China and the United States.
The Fed's policy committee, the Federal Open Market Committee (FOMC), said on Tuesday it would use cash from maturing mortgage bonds it holds to buy more government debt in a step to support the economy.
The BOJ held off on new policy steps to combat a stronger yen, saving its limited firepower in case the currency rallies more significantly.
The dollar hovered within sight of a 15-year low against the yen on Wednesday after the Fed's decision, dipping 0.2 percent to 85.32 yen compared with trading late on Tuesday.
If it slips below November's low of 84.82 yen, it would mark the currency's weakest level in 15 years.
The FOMC made an announcement and after that the market moves have become a little one-sided, Finance Minister Yoshihiko Noda told reporters.
In any case, excessive and disorderly moves in the currency market would negatively affect the stability of the economy and financial markets. Therefore, I am watching market moves with utmost attention.
A Reuters survey showed that Japan's economic growth is expected to halve in the second quarter to 0.6 percent from 1.2 percent in the previous quarter, as export growth and private consumption slowed.
Second-quarter data on gross domestic product is due on August 16.