The data is the latest in a series of disappointing figures, including July exports and output, that cast doubt over the strength of Japan’s expected recovery from its post-quake slump.
The report could put pressure on the government and the Bank of Japan to act to ensure that the yen does not strengthen further by intervening in the market and further easing monetary policy.
The brisk pace at which Japanese companies restored supply chains and production crippled by the March 11 disaster had convinced economists that the world’s third-largest economy will resume growth this quarter, expanding at the fastest rate among major developed nations.
Yet the latest statistics suggest the yen’s recent strength, concerns about Europe’s sovereign debt crisis and fears that the world economy could slip back into recession are beginning to bite.
“Monthly data suggest the economy has already seen a V-shaped recovery and is likely to see only flat growth or even deceleration from the autumn and there is an emerging risk of a contraction in the fourth quarter,” said Taro Saito, senior economist at NLI Research Institute.
Core machinery orders, a leading indicator for corporate capital spending, fell 8.2 percent in July from the previous month, Cabinet Office data showed on Thursday. That compared with a median market forecast for a 4.1 percent decline and follows a 7.7 percent rise in June.
Compared with a year earlier, core orders increased 4.0 percent in June, much less than an 8.5 percent rise expected by economists.
Separate data showed the current account surplus fell more than expected in the year to July as exports weakened. A service sector sentiment index also published on Thursday fell for the first time in five months, in another sign that the yen’s strength and recession fears were sapping business confidence.
“Uncertainty on overseas economies started to increase in July, which may have prompted some corporations to rein in their capital spending on lower expectations for business growth,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo.
Sumco, the world’s No. 2 supplier of silicon wafers used to make chips, on Wednesday slashed its annual operating profit forecast by 37 percent on weak PC demand and slower-than-expected growth in smartphones and tablet PCs, and said the fragile economy could make demand retreat further.
Adding to pressure on exporters, the yen has been attracting safe-haven demand from investors unsettled by Europe’s debt crisis and the US economic slowdown, even as Japan struggles with its own debt burden and its new government faces a long battle to gain consensus over how to fund its biggest rebuilding effort since the years after the Second World War.
The currency stabilized in the past days below its record highs hit in mid-August allowing the central bank to keep its policy on hold on Wednesday after it eased in August.
The BOJ stuck to its view that the economy would resume moderate growth from the next quarter, but highlighted risks posed by the yen, and growing uncertainty about the health of Europe’s and US economies.
Many economists still think the momentum of upswing in output in the months after the quake will be enough to produce robust overall growth in July-September after three quarters of contraction.
But they have started questioning the assumption that foreign demand and reconstruction spending will carry the economy forward in the final quarter of this year and early in 2012.
“Full-fledged reconstruction demand is unlikely to emerge throughout this year given the delay in the third supplementary budget,” NLI’s Saito said.
Prime Minister Yoshihiko Noda’s new government formed last week is due to compile the main reconstruction budget in mid-October at the earliest.
