By Tetsushi Kajimoto and Leika Kihara
TOKYO/MATSUMOTO, Japan (Reuters) - Japan's core machinery orders fell more than expected and a central banker warned of headwinds from soft overseas growth, underscoring the difficulties of sustaining the economic recovery Prime Minister Shinzo Abe's stimulus policies generated.
Board member Ryuzo Miyao stressed the Bank of Japan's readiness to loosen monetary policy again should the global economy and domestic wages fail to pick up, forcing a change to the central bank's upbeat economic forecasts.
"I see risks somewhat tilted toward the downside for both the economy and prices," said Miyao, who is among those in the nine-member board relatively pessimistic about the outlook.
"If the BOJ were to act again, it won't rule out any policy steps in advance," he told a news conference on Wednesday after meeting with business leaders in Matsumoto, northwestern Japan.
Miyao's comments came after data showed core machinery orders, a volatile series regarded as a leading indicator of capital expenditure, fell 2.1 percent in September, more than a median market forecast for a 1.4 percent drop.
Firms surveyed by the government forecast that core orders would fall 2.1 percent in the final three months of 2013 after two straight quarters of increases, suggesting that business investment remains the weak link in keeping the economy afloat.
Sluggish capital spending is a source of concern for Abe, who needs a pick-up in business investment to help drive a sustained recovery in the economy after 15 years of deflation.
Still, the government stuck to its assessment that machinery orders are picking up, and analysts said capital spending still seemed on track for a gradual recovery.
"Companies seem hesitant to boost capital spending due to uncertainty over overseas economies, and domestic conditions after a sales-tax hike next April," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
"As such, capital spending is on track for a recovery but it is unlikely to pick up the pace of recovery for the time being," he said.
MORE PESSIMISTS AT BOJ
Japan's economic growth has so far outpaced other G7 nations this year, thanks in part to the central bank's aggressive monetary easing in April that boosted household spending and weakened the yen, benefitting exports.
Data due on Thursday is forecast to show growth likely slowed in July-September, but it is seen accelerating again as consumers lift their spending before the sales tax doubles in April.
Having offered a massive stimulus just seven months ago, the BOJ is in no mood to ease again unless a severe shock threatens its long-term growth forecasts. The government isn't applying pressure for more action now and many analysts expect the BOJ to hold pat at least until well into next year.
But some analysts believe the BOJ may be forced to expand stimulus again if exports do not pick up in time to make up for a slump in consumption after next year's sales tax hike, or if inflation does not accelerate quickly enough.
"We must be mindful of the possibility that global and U.S. economic recoveries may be delayed depending on how U.S. fiscal problems play out," Miyao told business leaders in Matsumoto.
He also warned of the risk that the coming sales tax hike may hit the economy harder than expected as households spend less, which in turn could slow the pace of price rises.
For now, the BOJ expects the economy to overcome such risks. In a twice-yearly outlook report released last month, it revised up its economic growth forecast and projected that Japan will make steady progress toward meeting the bank's 2 percent inflation goal in two years.
But two of the nine board members dissented against the two-year timeframe for achieving the price target, while another voted against the report, calling for more emphasis on downside risks to the outlook.
Miyao's remarks on Wednesday add to such voices of caution over the BOJ's rosy outlook, underscoring a rift within the board over the bank's price target, criticized by many analysts as being too ambitious.
However, Miyao maintained the view that Japan's economy is recovering moderately driven by strength in consumption, which will help accelerate inflation as companies feel more confident about passing along higher costs to consumers.
"The recovery in personal consumption and non-manufacturers may broadly push up prices, as they affect a wide sector of the economy," he said.
The BOJ has kept monetary policy on hold since offering an intense burst of stimulus in April, under which it pledged to accelerate inflation to 2 percent in roughly two years by doubling base money via aggressive asset purchases.
(Editing by John Mair and Richard Borsuk)