Array

TOKYO, May 15 (Reuters) Japanese machinery orders fell surprisingly sharply in March, government data showed on Monday, dampening speculation that the Bank of Japan might end its zero-interest-rate policy imminently.

BOJ Governor Toshihiko Fukui himself played down speculation of an imminent policy tightening, saying the central bank would not necessarily raise rates immediately when it finishes mopping up excess funds in the banking system.

While Fukui said the BOJ could take its time in raising interest rates if the economy moved in line with its scenario for sustained but slower growth, he also pointed out the risks were more to the upside than to the downside.

''His comments left me with the impression that there will be no rate rise in June. But there remains the possibility of a rate rise in the July-September quarter,'' said Makoto Yamashita, chief JGB strategist at Lehman Brothers.

''Finishing the reduction of the balance of current account deposits and ending a period of zero interest rates are completely different issues,'' Fukui told an economic seminar.

''While we will look at movements in the money market to gauge the reduction of funds, interest rate levels will be determined by economic and price conditions.'' The surplus liquidity is the remnant of a five-year-old ultra-easy monetary policy the BOJ scrapped on March 9, and Fukui's remarks earlier this month that the drawdown would be finished ''within several weeks'' fanned speculation that the rate hike may come as early as June 15.

In a separate speech later in the day, Fukui said: ''Both Japanese and U.S. central banks are close to a turning point in monetary policy.

''It won't be enough for us to use rises in prices as a guidepost for policy in stabilising prices over the medium to long term,'' he said.

''It will be important to quickly identify the risks that may cause swings in the economy in the long run and respond accordingly.'' But a weak reading in machinery orders rekindled market concerns about the economy as the yen rises sharply and Tokyo share prices retreat, cooling market talk the BOJ might raise short-term rates for the first time in six years as early as next month.

Core private-sector machinery orders, a key but volatile gauge of capital spending, fell a seasonally adjusted 5.2 percent in March from the previous month, compared with a consensus market forecast for a 0.5 percent increase, Cabinet Office data showed.

''It does suggest the economy hasn't really taken off and we are still in the twilight zone when it comes to getting out of deflation,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan, who added that further evidence of a slowing economy could make the central bank more cautious.

Japan's January-March gross domestic product figures, due out on Friday, are expected to show that the economy decelerated sharply from an annualised growth rate of 5.4 percent in the previous quarter.

INFLATION CONCERNS The Nikkei share price average dropped on the machinery orders numbers, compounding a loss of some 5 percent over the past week, but it rebounded after Fukui's remarks. The Nikkei ended at 16,486.91, down 0.69 percent on the day but more than 1 percent above the day's low.

Japanese government bonds were mixed, with the benchmark 10-year Japanese government bond yield up 1.5 basis points at 2 percent, near a seven-year peak touched last week.

The yen was hovering near eight-month highs near 109.30 to the dollar The currency has strengthened nearly 10 percent in the last month, raising concerns about the impact on Japan's exports, which become less competitive when the yen rises.

''It's actually getting a bit difficult for the BOJ to raise rates quickly, given the yen's rise and the pullback in stock prices,'' said Takumi Tsunoda, economist at Shinkin Central Bank Research Institute. ''If the U.S. Federal Reserve halts its rate increases, that would make it even more difficult for the BOJ.

''Having said that, Governor Fukui has warned that keeping real interest rates too low would risk allowing the economy to overheat, and a rate rise will come sooner or later.'' Indeed, the BOJ's own data showed Japanese wholesale prices rose more than expected in April due to higher prices of commodities, which was slowly filtering through the economy.

The corporate goods price index (CGPI) for April was up 2.5 percent from a year earlier, above a consensus market forecast of a 2.3 percent rise.

Separate data from the Ministry of Finance on Monday showed the current account surplus widened 32.8 percent in March from the same month a year earlier to 2.3951 trillion yen ($21.85 billion).

But the trade surplus fell 6.0 percent from a year earlier to 1.1086 trillion yen as higher oil prices boosted imports. A big surplus in the income account, on bulging returns on past overseas investment, helped push up the current account surplus.

($1=109.62 Yen) REUTERS PV DS1703