Nikkei falls 1.4%, machinery orders add worries

There has been 14.8% fall in orders in May from the previous month

Japan's Nikkei share average suffered its biggest fall in over a month on Monday as surprisingly weak Japanese machinery orders fanned worries about faltering global growth sparked by sluggish U.S. jobs figures.

While some market players see the Nikkei's retreat is a healthy correction after five straight weeks of gains, others fear that further signs of a global slowdown could reverse the market's rally since early June.

Although Japanese machinery orders data can be highly volatile, a 14.8 percent fall in orders in May from the previous month -- the largest drop since comparable numbers became available in April 2005 -- shocked some market players.

The machinery data "raised anxiety" about the impact that Europe's debt crisis can have on Japan's economy, said Kenichi Hirano, market analyst at Tachibana Securities.

He said that while Japanese companies are expecting average profit growth of 10 to 15 percent this financial year, "that may have to change."

The Nikkei fell 1.4 percent to 8,896.88, posting its daily biggest fall since June 8 and slipping for the third straight session. The broader Topix index dropped 1.0 percent to 763.93.

"I think it is natural to have some adjustment after five straight weeks of gains. The BOJ tankan showed strong capital spending plans so one weak machinery order number alone shouldn't be a source of concern," said Soichiro Monji, chief strategist at Daiwa SB Investments.

On the daily Ichimoku chart, the Nikkei stood just above an important support from the tenkan line at 8,888. Another key support is its 25-day moving average, which stood around 8,750 but looks set to rise near 8,800 in coming days.

The Nikkei was also hit by the U.S. jobs data released on Friday, which showed a third month of a tepid job growth but was not weak enough to significantly boost expectations of more stimulus from the U.S. Federal Reserve.

In addition, China's annual consumer inflation fell to 2.2 percent in June from 3 percent in May, adding to fears about slowing growth, with Shanghai shares falling to fresh six-month lows.

A combination of weak domestic machinery orders and worries about China made machine makers a prime target for selling, with the Tokyo Stock Exchange's machine maker subindex falling 2.2 percent.

Komatsu fell 4.0 percent as Nomura Securities downgraded the stock to "neutral" from "buy" and cut its target price. Competitor Sumitomo Heavy Industries shed 3.3 percent.

Tokyo Electron fell 6.5 percent after the manufacturer of chipmaking machines said on Friday its orders in April-June fell 28 percent from a year earlier, prompting JPMorgan to downgrade the company to "neutral" from "overweight".

On the other hand, defensive stocks gained, with pharmaceuticals up 1.1 percent and utilities rising 0.6 percent.

On the main board, 535 shares made gains while 1,016 shares declined. Trade volume was thin, with only 1.28 billion shares traded, the smallest number since January 5.

The market is unlikely to draw support from a Bank of Japan two-day policy meeting that concludes on Thursday. After recently updating its economic assessment, the BOJ is not expected to take easing steps.

"A move has not been priced into the market because it would seem contradictory of them to ease after a pretty rosy economic review last week and a surprisingly positive tankan survey before that," said Hiroyuki Fukunaga, CEO of Investrust.

On July 5, the BOJ upgraded its assessment for all nine regions of the economy for the first time in nearly three years as strong private consumption and post-tsunami reconstruction supported growth. A tankan survey on July 2 showed companies were more upbeat about business conditions.