By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's machinery orders fell unexpectedly in May as a strong yen and weak demand eroded corporate profits and spending plans, a sign the economy is struggling to attract the investment it needs to sustain growth.
Cabinet office data published on Monday showed a 1.4 percent fall in core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, and fell well short of economists' forecast of a 2.6 percent gain in Reuters poll.
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In a statement accompanying the data, the Cabinet Office said machinery orders are "stalling", a downgrade from April's assessment that said orders were showing signs of "pickup".
Weak capital expenditure adds pressure to Prime Minister Shinzo Abe to do more to rev up growth. He is expected to compile an economic stimulus package later this year after his ruling bloc won a landslide victory in Sunday's upper house election.
Core orders, which exclude those of ships and electricity, stood at 785 billion yen ($7.79 billion), the lowest level since June 2014.
Abe has been counting on capital expenditure to help generate a virtuous growth cycle of higher wages and increased household income and consumption to drive growth.
Britain's shock vote last month to exit the European union has clouded Japan's economic outlook, pushing up the safe-haven yen and chilling sentiment among Japanese exporters.
"Machinery orders are likely to weaken ahead rather than recover. The ill-effects of a rising yen in the wake of Brexit are expected to emerge from now on," said Koya Miyamae, senior economist at SMBC Nikko Securities. "There are few factors that would make us optimistic about the outlook for machinery orders and capital spending."
Orders from overseas, which are not included in core orders, dropped 14.8 percent in May from the previous month, down for a second straight month and reflecting falling orders for industrial machinery, trucks and other vehicles, officials said.
Policymakers are in a bind, with companies hesitant to boost investment as they struggle with a weak economy and a strong currency, while the Bank of Japan's adoption of negative rates failed to convince companies to invest more.
Compared to the previous month, orders from manufacturers fell 6.4 percent weighed on by industries such as information and communications and production equipment machinery, while those from the services sector dropped 0.3 percent, the data showed.
($1 = 100.7800 yen)
(Reporting by Tetsushi Kajimoto; Editing by Eric Meijer and Sam Holmes)