Japanese machinery orders fell slightly in May, data showed on Thursday, but the drop was smaller than expected after a surge the previous month and economists said a recovery in the economy remained strong.
Core private-sector machinery orders, a volatile but closely watched gauge of trends in capital spending, fell 2.1 percent in May from April on a seasonally adjusted basis, government data showed.
That was smaller than the median forecast of a 3.8 percent fall in a Reuters poll of 27 economists last week. Compared with the same month last year, core orders were up 8.8 percent against a poll forecast of 6.8 percent.
Economists said the month-on-month drop was no surprise following an 11.8 percent jump in April and that spending by companies remained generally firm, albeit not as strong as during an export-led rush late last year.
"I don't think there are any signs at all that capital spending is peaking out," said Richard Jerram, an economist at ING Securities.
"We might see it slow down in six months or so but at the moment there seems to be very good momentum," he said.
A government official told a briefing there was now a good chance that core orders would show a rise for the April-June quarter from the previous quarter.
The government has forecast a fall in orders of 3.2 percent in the April-June quarter after a fall of 5.6 percent in January-March and an 8.5 percent rise in October-December last year. It does not issue revisions to these quarterly forecasts.
Adding to economists' optimism, the government is set to upgrade its economic assessment for the first time in six months in a report next week, government sources said.
The July economic report, expected to be released on Tuesday, will say the economy is recovering firmly, with improvements in the corporate sector spreading to households, they said.
Reaction to the machinery orders data and the expected upgrade was muted in financial markets, as investors focused on the possibility of Prime Minister Junichiro Koizumi's reform agenda being undermined.
Some media commentators have speculated that his party could make a weak showing in an election for parliament's upper house on Sunday.
Separate data announced on Thursday showed sentiment among workers in Japan's services sector fell in June for the second straight month but the index remained above the critical level of 50 for the fifth consecutive month.
The Cabinet Office survey of service sector workers, called "economy watchers" for their proximity to consumer and retail trends, had a diffusion index of 51.4, down from 52.8 in May.
The Bank of Japan's latest "tankan" survey of corporate sentiment released last week showed Japanese companies more confident about business conditions than at any time since the country's asset bubble burst in the early 1990s.
The central bank holds a policy-setting meeting next Monday and Tuesday with discussion likely to focus on how it will steer an eventual tightening of its super-loose policy without prompting wild swings in bond yields that could hurt the economy.
The BoJ's data on private bank lending also underscored an improvement in financial conditions along with the broadening economic recovery.
Lending by Japanese banks was down 3.7 percent in June from the same month last year at 448 trillion yen ($4.1 trillion), the BoJ said.