Japanese machinery orders increased more than expected in December due to large demand from manufacturers, suggesting that companies may soon begin to ramp up their capital spending.

Core orders, which exclude volatile orders for ships and electricity supply, rose 20.1% compared with November, better than the 8.4% increase forecast by private economists. It was also the third sharpest rise on record.

The strong figure is a positive sign for the Japanese economy, because machinery orders are considered an early indicator for whether companies will increase capital spending, which accounts for about 15% of the country's gross domestic product. Firms have been holding off from new investments because of an uncertain domestic economic outlook. But Wednesday's data indicate that such activity could revive as a better global economy lifts Japanese exports, supporting the economy as a whole.

"The figures can be taken as a good sign for the nation's early recovery phase," said Junko Nishioka, an economist at Royal Bank of Scotland.

Although the government said the gain was likely magnified by one major order from a steel maker, the overall data still indicated that demand is recovering with both manufacturers and nonmanufacturers placing orders.

Manufacturer orders rose 17.1% from a month earlier, while those from nonmanufacturers increased by 22.9%, the data showed.

For the January-March quarter, companies expect orders to rise by 2.0% from the previous quarter, with manufacturers expecting a 2.3% increase and nonmanufacturers forecasting a 3.5% gain.

In the last three months of 2009, machinery orders rose for the first time in seven quarters, increasing 0.5%.

Overall orders fell by 11.3% from a month earlier in November.

The Japanese government is due to release Monday gross domestic product data for the final quarter of 2009, and private economists are forecasting that the economy grew a real 1.0% from the previous quarter.

If the GDP figures also provide evidence of an improvement in corporate capital spending, the government might upgrade its view of capital spending in its monthly economic report due later in the month, an official said.

"Capital expenditure may have hit bottom in November," said Keisuke Tsumura, a parliamentary secretary at the Cabinet Office. The government now says that capital outlays are seen to "stop falling but there is also weak movement in some areas."

The 20.1% increase in overall core orders was the third sharpest gain on record, exceeded only by the 27.2% increase in October 1996 and 20.8% climb in August 2000.

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