By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's core machinery orders unexpectedly rose for a second straight month in July, easing some pessimism over capital expenditure, but worries remain that weak demand and the yen's gains may still discourage companies from boosting investment.
Prime Minister Shinzo Abe's government has been counting on capital expenditure to drive private sector-led growth, but business investment has been slow to pick up because of the uncertain outlook and external headwinds.
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Cabinet Office data showed on Monday that core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, rose 4.9 percent in July from the previous month.
The rise in core orders, which excludes ships and orders from the electric power industry, compared with a 3.5 percent decline expected in a Reuters poll of economists and a 8.3 percent increase in June.
The reading followed a recent run of weak indicators, including exports, factory output and household spending, helping to allay fears that the economy may lose momentum in the current quarter.
"Capital spending is holding firm as companies are refurbishing their plant and equipment," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
"Given the current external situation, capital expenditures are unlikely to accelerate though. There's a downside risk of further yen rises if a U.S. rate hike causes another round of China shocks," he said.
Manufacturers' orders rose 0.3 percent, led by the steel industry, including chemical machinery such as separators and heat exchangers, while the services sector's orders increased by 8.6 percent, mainly contributed by the communications industry, the data showed.
The service-sector's orders were in part boosted by demand for smartphones and may not be sustainable, BNP's Shiraishi said, adding that labor shortages would also prevent business expenditures from accelerating.
Reflecting the fragility of external demand, overseas orders - which are not included in the core calculation - fell 11.7 percent in July from June.
Japan's economy grew at an annualized rate of 0.7 percent in April-June, revised up from initial estimates but much slower than the prior quarter's growth led by leap year effects, as exports and capital spending sagged.
With growth struggling to accelerate and inflation sliding away from the Bank of Japan's 2 percent target, most analysts expect the central bank to loosen policy later this month when it conducts a comprehensive assessment of its monetary stimulus program.
(Reporting by Tetsushi Kajimoto; Editing by Eric Meijer)