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Japan's strong Aug machinery orders bodes well for durable recovery

* Core machinery orders +5.4 pct mth/mth vs f'cast +2.0 pct

* Recovery in capex a key to success of "Abenomics"

* Govt says machinery orders are picking up

* Sluggish wages pose challenges for policymakers

By Tetsushi Kajimoto

TOKYO, Oct 10 (Reuters) - Japan took another step forward to

cementing a durable economic recovery, as core machinery orders

rose in August to their highest level since the global financial

crisis, a welcome sign for achieving sustainable growth.

The 5.4 percent month-on-month rise in core orders, which

exclude those for ships and electric power utilities, was the

first rise in three months, data from the Cabinet Office showed

on Thursday.

The reading also beat economists' median forecast for a 2.0

percent gain, and followed a slight fall in July.

The value of core orders reached 819 billion yen ($8.4

billion), the biggest since the Sept. 2008 collapse of U.S.

investment bank Lehman Brothers triggered the global recession.

The outcome is an encouraging sign for Prime Minister

Shinzo Abe, who is hoping the positive mood generated by his

reflationary policies, dubbed "Abenomics", will lead to a

virtuous cycle of higher capital spending, growth in wages and

private consumption.

The government and the Bank of Japan see a recovery in

capital spending as key in driving a sustained economic recovery

and breaking 15 years of grinding deflation, paving the way for

the ultimate success of Abe's policies.

Growth so far this year suggests that the recovery in the

world's third-largest economy is solidifying, although the jury

is still out on whether capital spending is about to take a

decisive turn for the better.

Second quarter gross domestic product data last month showed

capital spending rose 1.3 percent, marking the first increase in

six quarters.

"The (machinery) data confirmed a recovery in capital

spending led by non-manufacturers, reflecting effects from

Abenomics," said Takeshi Minami, chief economist at Norinchukin

Research Institute in Tokyo.

Japan's economy expanded for the third straight quarter in

April-June, outpacing other G7 nations with an annualised growth

of 3.8 percent, as the government's aggressive policies

bolstered household spending and drove down the yen, benefiting


Analysts expect companies to spend more on plant and

equipment in coming months as the BOJ's key tankan survey

earlier this month showed confidence among big manufacturers hit

its highest in nearly six years in the third quarter.

In another positive signal for the economy, Japanese

consumer confidence rose for the first time in four months in

September, a government survey showed on Thursday, reflecting

improved views on incomes and jobs.


For years Japanese firms have been hoarding cash, instead of

spending on plants and equipment or raising salaries, due in

part to the view Japan would remain mired in deflation, bringing

their total cash pile to some 220 trillion yen ($2.26 trillion).

Despite signs of a recovery in capital spending, many firms

remain reluctant to raise wages in defiance of Abe's call to

boost salaries, casting doubts about the sustainability of the

economy's recovery.

Data showed this month wage earners' total cash earnings

fell year-on-year for the second consecutive month in August,

with regular pay down for 15 months in a row, a sign a sustained

rise in wages is far from assured despite a rise in bonuses.

Underlining tame cash demand among companies, Japanese bank

lending grew just 2.0 percent in the year to September, separate

data from the Bank of Japan showed on Thursday.

The Cabinet Office raised its view on machinery orders,

saying they are picking up, from its previous view it was

increasing moderately.

The BOJ, which offered an intense burst of monetary stimulus

in April to achieve 2 percent inflation in two years, also

revised up its assessment of capital expenditure on Friday to

say it is picking up.

The Cabinet Office data showed orders from manufacturers

rose 0.8 percent, while orders from the services sector

increased 6.2 percent, underscoring firm domestic private


Compared with a year earlier, core orders, a highly volatile

data series regarded as an indicator of capital spending in the

coming six to nine months, grew 10.3 percent in August, above

economists' median estimate of a 8.7 percent gain.

Still, underscoring the challenges facing policymakers, some

analysts remain doubtful that the positive momentum can be

sustained, given companies' reluctance to raise wages.

"This data is certainly positive for Abenomics but it just

points to the beginning of the positive cycle and I doubt it can

be sustained, given sluggish wages," said Naoki Iizuka,

economist at Citigroup Global Markets Japan.