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Machinery orders unexpectedly advanced in August, government data showed Wednesday, in a sign that a recovery in earnings may encourage companies to spend on plants and equipment even as the yen surges.

Factory orders rose 10.1 percent from July, the largest increase since December, the Cabinet Office said. The median forecast of 28 economists surveyed by Bloomberg News was for a 3.9 percent decline. The data indicate business investment in three to six months.

Demand in emerging nations is prompting companies including Hitachi Construction Machinery Co. to increase production. Still, economists are forecasting the economy will contract this quarter and Bank of Japan Gov. Masaaki Shirakawa indicated Wednesday he’s prepared to expand a new ¥5 trillion fund aimed at stimulating domestic credit.

“There are concerns about the yen’s gain, along with the slowdown in global demand and exports,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “Even so, corporate cash flows are on a V-shaped recovery and overcapacity is easing, making it easier for companies to increase business spending, albeit slowly.”

Stocks of machinery and electric-appliance makers including Fanuc Ltd., Japan’s No. 1 maker of industrial robots, rose after the report.

Hitachi Construction, the world’s biggest maker of giant excavators, plans to produce a record number of machines in the fiscal second half because of higher than estimated demand in China, Chief Executive Officer Michijiro Kikawa said last week.

Japanese companies are becoming more optimistic about their earnings outlook. Large companies revised up their profit forecasts for the year ending next March, projecting last month a 28.3 percent increase in profits compared with a 21.6 percent increase outlook three months earlier, the BOJ’s “tankan” survey showed.

The BOJ last week cut its benchmark overnight interest rate for the first time since 2008 and pledged to hold it at “virtually zero” until officials foresee a sustained end to deflation. Shirakawa and his board also unveiled a program aimed at lowering long-term borrowing costs and the premiums on corporate debt.

“Utilizing the fund further is one probable option if it becomes necessary in the future,” Shirakawa said in the Diet.

Gross domestic product may shrink for the first time in more than a year in the three months that ended Dec. 31, according to a survey by the government-affiliated Economic Planning Association. The economy grew at a 1.5 percent pace in the second quarter, half the pace of the first three months of 2010.

Finance Minister Yoshihiko Noda said the government remains ready to take “bold” action, including currency intervention. Japan sold more than ¥2 trillion in last month’s operation, its first intervention since 2004.

Sony Corp., the world’s third-largest television manufacturer, is concerned demand growth may slow in the second half of the financial year amid signs the global economic recovery may be losing momentum, according to Vice Chairman Ryoji Chubachi. He also said last week that the yen’s appreciation is still making the company’s business “difficult” and has been like “a body blow.”

The advance in factory orders in August was led by the electrical machinery industry, Wednesday’s report showed. Large-lot orders from nonferrous metal and steel manufacturers also boosted the figure, according to the Cabinet Office.

Recent reports provide evidence the yen’s strength is holding back economic growth: the nation’s current-account surplus narrowed in August, industrial production unexpectedly declined for a third month and the tankan showed large manufacturers forecast that pessimists will outnumber optimists by year’s end.

“Companies are cash rich, but they aren’t aggressive about increasing business investment as they are cautious of the economic outlook,” said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co. in Tokyo.

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