Japanese machinery orders tumbled by the most in almost two years in May as companies grew more cautious about the business outlook due to a rising yen and signs of a global economic slowdown.
Bank lending in June also fell, matching the biggest annual decline in almost five years, as demand from companies for funds to invest in plants and equipment remained sluggish.
Bank of Japan governor Masaaki Shirakawa stuck to the central bank's view that Japan's economy was showing further signs of a moderate recovery, but he and other market watchers voiced concerns about the potential fallout from Europe's debt woes.
A senior government official said there was a risk Japan's economy may enter a lull, after service sector sentiment worsened for two straight months in June.
Core private-sector machinery orders, a highly volatile series regarded as an indicator of capital spending, fell 9.1 percent in May, the biggest decline since August 2008 and far more than the median market forecast for a 3.1 per cent decline.
The decline in machinery orders could be a fresh warning sign for the ruling Democratic Party as an upper house election approaches on Sunday.
Public support for new prime minister Naoto Kan is slipping as he struggles to convince voters that his party can repair public finances with higher taxes and boost growth with its economic policies.
Worries about Europe's debt problems and the health of the global recovery have helped push the yen up more than 5 per cent against the U.S. dollar this year as investors shun riskier assets, which could hurt business sentiment, economists say.
The dollar stood around 88.30 yen today, edging off a seven-month low of 86.96 yen hit at the start of the month.
Machinery orders from manufacturers fell 13.5 per cent in May, faster than a 5.5 per cent decline the previous month.
The effects of government stimulus measures for energy-efficient electrical appliances have started to dwindle, Keisuke Tsumura, parliamentary secretary of the Cabinet Office, told a news conference, adding that the pace of recovery in capital spending could be slower than anticipated.
Moves in gross domestic product (GDP) tend to lag moves in machinery orders by one quarter. Over the past 10 years, GDP had a correlation coefficient of 0.4 with machinery orders, according to Reuters calculations. A coefficient of 1 means two variables move in lockstep.
The mood among Japanese businesses turned positive for the first time in two years and big firms revised up capital spending plans due to a recovery in exports, a Bank of Japan survey showed earlier this month.
But the improvement in sentiment could slow as manufacturing data from China and the United States suggests that the global economic recovery may be losing some momentum, economists say.
Weak global financial markets are also eroding consumer and corporate sentiment.
Japan's service sector sentiment index fell to 47.5 in June from 47.7 in May, a Cabinet Office survey showed. The outlook index, indicating the level of confidence in future conditions, fell to 48.3 from 48.7 in May.
Other data released today showed outstanding loans held by Japanese banks fell 2 per cent in June from a year earlier, the same annual rate of decline as in May, indicating companies remain reluctant to expand their activity.
Reuters