Japanese machinery orders unexpectedly fell for a second month in February, a sign that the resurgence in overseas demand isn’t enough to compel companies to spend on plant and equipment.

Orders, an indicator of business investment in three to six months, declined 5.4 percent from January, the Cabinet Office said today in Tokyo. The median estimate of 31 economists surveyed by Bloomberg was for a 3.7 percent gain.

Business spending has lagged behind the trade revival as companies including Mitsubishi Paper Mills Ltd. cut costs to protect earnings. The Bank of Japan yesterday kept interest rates at 0.1 percent and repeated a pledge to combat deflation even as it became more optimistic that exports will help to sustain the recovery from the country’s worst postwar recession. “The report underlines the fact that companies are extra cautious about boosting their investment,” said Susumu Kato, chief economist at Credit Agricole CIB and CLSA in Tokyo, whose prediction for a 6.2 percent drop was the most accurate. “They need evidence that recovery is taking place not only in Asia but also Europe and the U.S.”

A Finance Ministry report today showed exports jumped 47 percent in February from a year earlier, the fastest pace since comparable data became available in 1986, helping the current- account surplus climb to 1.47 trillion yen ($15.8 billion). The yen traded at 93.34 per dollar at 11:29 a.m. in Tokyo from 93.21 before the reports were published. The Nikkei 225 Stock Average dropped 0.8 percent, paring its gains over the past month to 5.8 percent.

‘Leveling Off’

Machinery orders are still up from a record low reached in November, and the Cabinet Office maintained its view that they are “leveling off.” Steel, chemical and electrical machinery makers led the month-on-month drop in February. From a year earlier, orders slid 7.1 percent, the 20th straight decline.

“We’d like to carefully monitor developments in material industries because rising commodity prices may affect their earnings,” said Keisuke Tsumura, a parliamentary secretary at the Cabinet Office.

The Bank of Japan became more upbeat about the economy this month, saying after yesterday’s policy meeting that exports are driving the expansion. Previously it described stimulus measures as the main reason for the rebound.

Economists including Kiichi Murashima at Citigroup Global Markets Japan Inc. say the central bank may increase growth projections in its twice-annual economic outlook on April 30.

Shirakawa Optimistic

BOJ Governor Masaaki Shirakawa said capital spending “is leveling out, and given that profits are rising and the global economy is expanding, business investment is also expected to improve.” Companies may revise their spending plans “several percentage points” higher as the economic recovery becomes more entrenched, Shirakawa told reporters yesterday.

Large companies plan to cut outlays 0.4 percent in the year ending March 2011, the central bank’s Tankan survey showed last week. That’s the best March projection in three years.

“The worst is over for capital investment, but it won’t pick up anytime soon unless domestic final demand recovers,” said Naoki Tsuchiyama, market economist at Mizuho Securities Co. in Tokyo. “Some export-related manufacturers have started to resume spending. But others such as material industries aren’t benefiting from exports and remain cautious about investment.”

Mitsubishi Paper Mills said last week it will shut two production lines in Japan this year. The company revised down its earnings forecast to a loss of 1.8 billion yen for the year ended March 31 after taking a charge for the closures and other cost-cutting measures.

Nisshin Steel

Nisshin Steel Co., Japan’s fifth-largest steelmaker, needs to revive earnings to about 30 billion yen “as soon as possible” by cutting costs and selling higher-margin steel, President Hideo Suzuki said last month.

The drop in machine orders in February came two months after they surged the most in nine years. The decline is continued payback from the December jump, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

Indicators, including machinery orders and capital goods shipments, “seem to point to capital spending bottoming or gradually picking up,” Sato said before today’s report. Still, “a full-fledged recovery in domestic capital spending would need changes in the investment environment, such as a significant weakening of the yen or revision to the corporate tax structure.”

--With reporting by Minh Bui and Toru Fujioka in Tokyo. Editors: Lily Nonomiya, Russell Ward

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