UPDATE 1-Japan machinery orders fall, outlook remains bleak

TOKYO, Feb 9 - Core Japanese machinery orders fell 1.7 percent in December, far less than expected, although economists say corporate capital spending remains very weak as the global economic crisis shows no sign of letting up.

The nation's banks, less damaged than their western peers from the market turmoil, increased their lending by the most on record in January, as companies turn to their bankers in the face of a seized up credit market.

Japan, along with the United States and the euro zone, are in recession as the global financial crisis cuts exports, triggering cuts in production and jobs. Japan's current account surplus slid 92 percent in December from a year earlier.

While the fall in machinery orders was only one-fifth that expected by the market, analysts took little joy from it, saying there were one-off factors in the steel sector that would not be sustained.

The cash value of orders was at its lowest since 1987.

"Although the headline figure was better than expected, we cannot be optimistic given the sharp deterioration of the previous month and two straight quarters two-digit falls," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.

"Japan's capital expenditure will be significantly weaker in 2009 largely due to a deterioration of external demand.

Japan's Nikkei average rose 1.3 percent on Monday, buoyed by exporters such as Honda Motor Co on a weaker yen and amid hopes for economic stimulus measures by the U.S. government to bolster the economy.

Shares of machinery makers such as Komatsu Ltd rose, helped in part by the less-than-expected fall in machinery orders.

The fall in core private-sector machinery orders, a leading indicator for corporate capital spending, was much smaller than the median forecast from economists for an 8.8 percent fall.

In October-December, core orders, which exclude those for ships and machinery at electric power firms, fell 16.7 percent, the sharpest quarterly fall on record.

Many companies including Toyota Motors, which had been expanding production capacity to take advantage of robust growth in emerging markets until several months ago, have been forced to cut production as they face unprecedented losses.

That has led to a sharp drop in industrial output. Data due next week is expected to show that Japan's economy likely shrank at its fastest pace since 1974 in the final three months of 2008, a Reuters poll shows.

With much of the developed world seen contracting at least until the next quarter, many economists expect the Japanese economy to only start a slow recovery later this year.

"The economy may start growing in the latter half of this year but we can't expect it to achieve its potential growth rate, probably until the year after next," said Hiroshi Shiraishi, an economist at BNP Paribas.

"If the economy is still contracting later this year, it may be falling into a deflationary spiral."

The mounting gloom over the economy has been putting strains on financial markets, widening credit spreads sharply and making it difficult for companies with low credit ratings to issue debts in markets.

That led bank lending to rise 3.7 percent in January from a year earlier, Bank of Japan data showed.

Following a slight downward revision in December data, January's increase from a year earlier was the largest since the Bank of Japan started publishing the data in 2000.

The outstanding balance of commercial paper held by banks fell 10.1 percent in January from a year earlier after a 15.0 percent drop in December, reflecting the problems in credit markets.

The pace of fall slowed from the past few months after the BOJ said it would buy 3 trillion yen ($32.6 billion) of commercial paper by the end of March.

Wary of mounting woes for Japan's economy, the BOJ has nudged interest rates near zero and decided to buy commercial paper, corporate bonds and shares held by banks to ease credit strains.

Senior BOJ officials, including board member Atsushi Mizuno, has signalled that the central bank was ready to examine further steps to support the economy and ensure financial stability.