July 8 (Bloomberg) -- Japanese machine orders unexpectedly fell for a third month and the current-account surplus narrowed because of plunging exports, stoking concern that the economy will struggle to emerge from its worst postwar recession.

Orders, an indicator of spending by companies in the next three to six months, declined 3 percent in May from April, the Cabinet Office said today in Tokyo. The current-account excess shrank 34.3 percent from a year ago, the Finance Ministry said.

Stocks slumped for a sixth day on speculation that corporate earnings are unlikely to improve amid a dearth of demand at home and abroad. Mounting evidence that Japan’s revival will falter may prompt the central bank to extend its unprecedented credit programs as soon as next week.

“It’s still difficult to have any confidence that the economy’s rebound will continue through this year,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “Given the economy’s weakness, the Bank of Japan will probably decide to extend all of its emergency measures beyond their expiration at the end of September.”

The Nikkei 225 Stock Average slid 2.4 percent at the close in Tokyo. Bonds rose, sending the yield on the benchmark 10- year bond 1.5 basis points lower to 1.29 percent. The yen strengthened to a six-week high of 94.10 against the dollar as investors sought the relative safety of the currency on concern the worldwide slump will be prolonged.

Lowest Level

The median estimate of 25 economists surveyed by Bloomberg was for machinery orders to increase 2 percent. The decline, which was bigger than the predictions of all but two of those analysts, took the value of bookings to 668.2 billion yen, the lowest since comparable data became available in April 1987.

Exports tumbled 42.2 percent from a year earlier, a steeper drop than the previous month, causing the current account surplus to contract to 1.3 trillion yen ($13.8 billion). Imports fell 43.9 percent, the ministry said.

The world’s second-largest economy probably grew last quarter for the first time in a year, expanding at an annual 2.3 percent pace after a record 14.2 percent contraction in the first quarter, analysts say.

“The second-quarter GDP numbers are likely to be pretty strong,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “But with business and consumer spending weakening, there’s a good chance growth will slow after that.”

Tankan Survey

The Bank of Japan’s quarterly Tankan survey last week showed large firms expect earnings to fall 20 percent this fiscal year and plan to cut spending by a wider margin than they forecast three months ago.

“Today’s data underline that companies remain under strong pressure to trim capital investment further,” said Iwashita at Daiwa Securities SMBC.

Toyota Motor Corp., Japan’s largest automaker, is forecasting a second year of losses and is weighed down with factory capacity that exceeds sales forecasts by about 3.5 million vehicles. The company plans to slash spending 36 percent this year.

“A lot of companies are running somewhere near 50 percent of capacity,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “They’re hoping maybe they can boost that to 70 percent, but that’s still not a level that warrants new investment in plant and equipment.”

Credit Woes

Tight borrowing conditions may also inhibit spending. Bank lending rose 2.5 percent in June from a year earlier, the slowest pace in eight months, the central bank said today. Corporate bankruptcies rose 7.4 percent to 1,422 cases as businesses struggled to get access to credit and the recession crippled sales, a report by Tokyo Shoko Research Ltd. showed.

The central bank began purchasing commercial paper and corporate bonds this year to channel funds to companies. Policy makers also offered unlimited loans to commercial banks at 0.1 percent in exchange for approved collateral.

The three programs are scheduled to expire on Sept. 30, and the policy board may decide to extend them as soon as at its next meeting on July 14-15, said Masaaki Kanno, a former central bank official.

“Policy makers may conclude the bank had better decide on the extension this month if they need to do so anyway,” said Kanno, who is now chief economist in Tokyo at JPMorgan Chase & Co. “Making such an announcement in July can work as an anchor to prevent premature speculation about an exit policy.”

In a brighter sign, a Cabinet Office index today showed confidence among merchants rose to the highest level in more than a year in June. Prime Minister Taro Aso’s 25 trillion yen in stimulus spending, including cash handouts, tax breaks and incentives to buy eco-friendly cars and electronics, has at least helped Japan overcome the worst of the recession.

“Stimulus measures are playing a major role in boosting sentiment,” said Takuji Aida, senior Japan economist at UBS AG in Tokyo. “It’s unlikely that the economy will collapse this year.”

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: July 8, 2009 02:19 EDT