Japan's core machinery orders rose unexpectedly in February, reinforcing expectations that rebuilding in the earthquake-battered northeast will bolster corporate spending and economic recovery although risks loom from a resurgent yen and wobbly overseas economies.
Despite the positive surprise from the volatile data, analysts said the Bank of Japan was likely to remain under pressure to ease policy after it stood pat on Tuesday, especially given expectations that consumer price growth will remain short of its new inflation goal.
Core machinery orders, considered a leading indicator for capital spending, rose 4.8 percent in February from the previous month, beating the median forecast for a 0.8 percent decline.
The government upgraded its assessment on machinery orders for the first time in eight months, saying they were increasing moderately, compared with the previous view that they were moving sideways.
Corporate capital spending is apparently starting to get a boost from reconstruction-related demand, said Takeshi Minami, chief economist at Norinchukin Research Institute.
While exports remain stagnant, resilience in capital spending as well as in consumer spending is positive for the economy's recovery.
Graphic on machinery orders: http://link.reuters.com/bek95s
The recently resurgent yen poses a risk to that recovery, however, as rising Spanish and Italian bond yields underscored worries about the health of the euro zone and global growth, sending investors once more into safe-haven currencies.
The yen hovered around 80.70 to the dollar on Wednesday, close to this week's one-month high and strengthening considerably from last month's 11 month-low of 84.187, rekindling worries over declining exporter profits and an exodus of Japanese manufacturers to overseas production sites.
The yen's renewed strength indicates that the global economy has not yet stabilized, so Japan's economy may not enjoy a strong recovery, said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.
If the yen climbs past 80 to the dollar, it raises the possibility of further easing by the Bank of Japan later this month.
Although the BOJ kept monetary policy steady on Tuesday, markets are already factoring in monetary easing at its next meeting on April 27, when its revised long-term forecasts should show that a sustained end to deflation is a long way off.
The world's third-largest economy is expected to grow 1.9 percent in the fiscal year that began in April as rebuilding in the northeast gathers steam, but the BOJ is focused on price growth and eradicating the persistent deflation that has kept the economy fragile for much of the last decade.
Wednesday's data also showed that, compared with a year earlier, orders rose 8.9 percent in February, exceeding the median forecast for a 3.1 percent annual increase.
Orders from manufacturers rose 16.0 percent from the previous month, boosted by demand related to the shipbuilding and chemical sectors, while non-manufacturers' orders gained 2.3 percent as smartphones fuelled orders for telecommunications equipment, a Cabinet Office official said.
Japan's bank lending rose 0.8 percent in March from a year earlier, following a 0.6 percent increase in the year to February, separate data from the Bank of Japan showed.
The increase reflected growing demand for funds related to reconstruction after last year's earthquake, as wellas funding needs related to corporate M&A, a BOJ official said in a briefing.
(Writing by Rie Ishiguro; Editing by Edmund Klamann)