Core private-sector machinery orders fell a seasonally adjusted 9.6 percent in February from January for the first dip in three months, but the decline is largely a reaction to gains of 12.2 percent over the previous two months, the government said Wednesday.

The Cabinet Office's Economic and Social Research Institute maintained its upbeat opinion of the key early gauge of corporate capital spending, saying there are "signs of improvement" in machinery orders and that capital spending may pick up in the future.

Core private-sector machinery orders amounted to 842.1 billion yen in February, which represented an unadjusted 1.4 percent increase from a year earlier and the second straight month of yearly rise.

Core private-sector machinery orders are considered a leading indicator of corporate capital spending six to nine months in the future. The core orders exclude orders for ships and from electric power companies, which tend to be volatile due to their huge size.

Yoshihiko Senoo, director of the institute's Business Statistics Department, said although orders fell in February from January, figures for the January-March quarter are likely to be better than the government's earlier forecast of a 3.5 percent fall and may even post a positive reading.

To produce that 3.5 percent drop, core machinery orders would have to plunge 20.7 percent in March, but such a sharp fall is unlikely, he said.

"But one factor that can adversely affect the March reading is the war in Iraq, which might have prompted companies to postpone or cancel machinery orders," Senoo said. The war broke out on March 20.

Senoo said the January-March orders can enter positive territory if March figures show a fall of 10.2 percent or better. The orders rose a slight 0.3 percent in the October-December quarter for the first increase in two quarters.

"Capital investment is growing slightly in line with an earnings recovery at Japanese companies, but the growth cannot last nonstop because of continuing deflation," said Toshiyuki Hara, a senior market economist at Mizuho Securities Co.

He said companies will be unwilling to expand capital investment "unless they see good business opportunities promising returns for their investment." He added, however, that firms see no such opportunities given the current state of the Japanese economy.

In February, orders from manufacturers fell 9.1 percent from a month earlier to 328.5 billion yen, following an 11.4 percent increase in January.

Orders from nonmanufacturers were also down, falling 9.8 percent to 518.0 billion yen, following a 5.2 percent rise in January.