By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's core machinery orders tumbled in April-June at their fastest since the last global financial crisis and only a modest rebound is seen in the current quarter - further challenging policymakers contending with a fragile economy.
The highly volatile data point, a key indicator of capital spending, followed news on Wednesday that the economy suffered its biggest contraction since 2011 in the second quarter as April's sales tax hike took a heavy toll on private consumption.
With exports and factory production weakening, policymakers had hoped business investment would drive a virtuous cycle of output, income generation and consumption, but Thursday's anaemic numbers cloud the outlook for sustained growth.
Cabinet Office data out on Thursday showed core orders fell 10.4 percent in April-June from the previous quarter, marking the first slide in five quarters and the sharpest drop since January-March 2009 when orders declined 12.3 percent.
Companies surveyed by the Cabinet Office forecast that core orders would rise 2.9 percent in July-September.
Orders at manufacturers and service-sector firms fell 8.5 percent and 6.7 percent in April-June respectively. Manufacturers see orders falling 0.5 percent in the current quarter, while service-sector firms expect a 2.2 percent gain.
"The data suggests that any recovery in capital spending will be slack. What is lacking in Japan is companies' confidence in a growth outlook rather than inflation expectations," said Kyohei Morita, chief Japan economist at Barclays Capital.
"Japan must act quickly to implement its growth strategy, tackling issues such as cuts in the corporate tax rate, labor market reform and promotion of corporate governance."
Core orders, which exclude ships and power generation gear, rose 8.8 percent in June from the prior month, well below a 15.3 percent gain forecast in a Reuters poll of economists, and following a record 19.5 percent drop in May.
Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, declined 3.0 percent in June, versus the median estimate for a 3.3 percent annual increase.
The Cabinet Office said in a statement that machinery orders are seesawing, cutting its assessment for a second straight months. Previously it had said a rising trend was seen stalling.
"The forecasts for the third quarter do not look that strong," said Shuji Tonouchi, senior fixed income analyst at Mitsubishi UFJ Morgan Stanley Securities.
"Companies were initially optimistic about capital expenditure for the current fiscal year, but companies could be turning cautious in the short term as consumer spending has been disappointing."
Corporate investment is one of the key and so far missing ingredients of Prime Minister Shinzo Abe's recipe for economic revival, dubbed "Abenomics", aimed at pulling Japan out of nearly two decades of stagnation and deflation.
Steady corporate earnings and the need for upgrades of ageing equipment and facilities, particularly among non-manufacturers, are expected to underpin business investment, analysts said.
The Bank of Japan's key tankan survey also argues for a moderate pick-up in capital spending ahead, with big firms planning to raise investment by 7.4 percent in the fiscal year to next March.
The economy shrank an annualized 6.8 percent in April-June, its biggest slump since the March 2011 earthquake, with capital spending falling for the first time in five quarters, stoking fears that any rebound may be too modest to sustain firm growth.
Policymakers and private-sector economists expect that the economy will rebound from the current quarter after taking a temporary hit from the rise in sales tax rise to 8 percent from 5 percent.
(Editing by Eric Meijer)