By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's core machinery orders suffered a steep drop in December and companies expect more declines in the January-March quarter, a worrying sign for capital spending seen as key to cementing a recovery in the world's third-largest economy.
The 15.7 percent decline in orders, a leading indicator of capital expenditure, was much worse than a projected 4.1 percent decline and was the largest since comparable data available from 2005.
Companies surveyed by the Cabinet Office forecast that core orders, which is a highly volatile data series, will fall 2.9 percent in January-March, which would be the first drop in four quarters.
The data could fuel skepticism of Prime Minister Shinzo Abe reflationary policies, known as "Abenomics", which has combined a massive injection of fiscal and monetary expansionary to pull the economy out of a decades-long slump.
A central plan of Abenomics is to spur capital spending to create a virtuous cycle of job creation, higher wages and consumer spending.
"Companies are turning cautions before the sales tax hike," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
"Capex could contract in April-June as well. If capex doesn't recover in the second half of year, there will be expectations for the government and the BOJ to respond."
The weak orders data raises doubts that a freeze in business investment is thawing, which would hurt efforts to conquer 15 years of persistent deflation and foster sustained growth..
Capital spending has been anemic for years, with Japanese firms hesitant to boost investment on plants and equipment, because of a deep-rooted view that Japan would remain mired in deflation and sustained economic recovery is far from assured.
Capital spending has shown some tentative signs of recovery as companies increased output before a sales tax increase scheduled for April.
However, companies have been cautious about opening the taps further on spending despite BOJ data that shows corporate Japan sits on a cash pile of some 220 trillion yen.
Compared with a year earlier, core orders rose 6.7 percent in December, less than a 17.6 percent gain expected.
The BOJ, which holds a regular policy review next week, has kept policy steady after embarking on an aggressive stimulus last April, pledging to double base money via aggressive asset purchases to spur inflation to 2 percent in roughly two years.
Gross domestic product data due on February 17 is likely to show the economy expanded 0.7 percent in October-December, or 2.8 percent annualized, with capital spending rising 1.9 percent to mark a third straight quarter of gains, according a Reuters poll of analysts.
(Reporting by Tetsushi Kajimoto; Editing by Shri Navaratnam)