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TOKYO (Thomson Financial) - Japan's November core private sector machinery orders fell a seasonally adjusted 2.8 percent from the previous month to 1.05 trillion yen on declines in orders from the ceramics and clay, chemical, metal product, iron and steel sectors, the Cabinet Office said Tuesday.

Yet the latest report also showed an underlying firm trend of corporate capital investment thanks to solid exports to emerging markets, thereby preventing corporate capital investment, which accounts for nearly 15 percent of the world's second-largest economy, from slipping into a falling trend.

The fall, the first in two months, followed a 12.7 percent surge in October.

The decline in November was below market expectations for a fall of 5.0 percent.

Core private sector machinery orders, which exclude orders from electric utilities and for ships, are regarded as a leading indicator of corporate capital spending.

Machinery orders rose 0.9 percent in November from the same period last year after rising by 3.3 percent in October.

Despite the downturn, the Cabinet Office is sticking to its assessment that the trend in machinery orders is flat, which is the seventh straight month that the agency has made the same assessment.

"Given the fact that the value of core private sector machinery orders had been moving in a certain range (around 1 trillion yen) since late 2006, we have decided to maintain our view," an economist at the Cabinet Office said.

Private sector economists share the government's view.

"A smaller than expected payback from the robust gain in October increases the likelihood that machinery orders will show a second straight quarterly rise in the whole of the October-December quarter," Mitsubishi UFJ Securities senior economist Tatsushi Shikano said.

For the October-December quarter, core machinery orders are forecast to rise 3.1 percent, which the Cabinet Office said can be attained if orders rises 3.6 percent in December.

In the July-September quarter, core private sector machinery orders rose 2.5 percent from the previous quarter.

"Altogether, machinery orders continue to recover thanks to brisk exports to emerging markets," Norinchukin Research Institute senior economist Takeshi Minami said.

In November, machinery orders placed by the manufacturing sector fell 1.7 percent from October and were up 4.6 percent from a year earlier, with 11 out of 15 sectors registering a fall.

But economists warned of the adverse impact of dwindling housing investment.

Orders placed by ceramics and clay makers fell 33.2 percent in November from October, while orders from metal products makers dropped 24.5 percent and orders from the iron and steel sector fell 13.5 percent due to the adverse impact of dwindling housing starts.

Housing starts have been plummeting at a double-digit pace since July due to the introduction of tighter building rules.

The revised Construction Standard Law has made the certification of building blueprints stricter, following revelations that lax screening procedures had made it possible for construction plans with fake anti-seismic data to be approved.

"In the near-term, a tug of war between solid investment on machine tools and plants and weak spending on construction materials will continue," Norinchukin's Minami said.

Meanwhile, orders placed by non-manufacturers rose 3.1 percent from the previous month but were down 0.9 percent from a year ago.

Among non-manufacturers, orders placed by telecom service operators rose 48.4 percent thanks to the release of new handsets, while orders from the transportation service sector increased by 21.8 percent.

Foreign orders fell 18.4 percent from October and were down 9.2 percent from a year earlier, hit by fewer orders for power generators and machine tools.

Public orders jumped 11.7 percent from the previous month and were up 13.5 percent from a year ago.

Total orders rose 5.9 percent to 2.65 trillion yen from the previous month and were down 1.4 percent from a year earlier.

While the smaller-than-expected decline in November orders and the expected rise in orders in the October-December quarter suggest that corporate capital investments will avoid the risk of entering a fully-fledged downtrend, economists warn of the adverse impact of growing downward pressure on profits and uncertainty about the US economy on the trend of capital investment going forward.

"Due to a slowdown of corporate profits, Japanese companies are already beginning to curtail spending on new labour or capital investment," RBS Securities chief economist Mamoru Yamazaki said.

The Ministry of Finance said recently that the combined pretax profit of non-financial companies at the parent level dipped 0.7 percent in the third quarter from a year earlier, the first fall in 21 quarters, hobbled by surging procurement costs, a stronger yen and sluggish domestic demand.

"But the odds are low that capital investments would start falling cyclically given the need to continue to spend on plant automation systems and update aging factories to deal with growth in demand in emerging markets," Norinchukin's Minami said.

(1 US dollar = 106.63 yen)