Japan's core machinery orders rose at a faster pace than expected in January in a sign that rebuilding the country's tsunami-battered northeast coast could propel capital expenditure and support the fragile economy.

Core machinery orders, which help gauge the strength of capital spending, rose 3.4 percent in January from the previous month, beating a median market forecast for a 1.6 percent increase.

The data bolsters the argument that domestic demand can drive the world's third-biggest economy this year as the country rebuilds from last year's disaster and could stay the hand of the Bank of Japan when it starts a two-day policy meeting later on Monday.

Other recent data, including larger-than-expected gains in industrial output and an upward revision to fourth quarter gross domestic product, also raised hopes that Japan's economy will gather momentum this year.

The data shows corporate capital spending is rising moderately thanks partly to reconstruction-related demand, although the momentum is not that strong, said Junko Nishioka, chief economist at RBS Securities in Tokyo.

As reconstruction shifts to a higher gear, corporate capital spending is expected to pick up in April-June this year. As the yen has eased and corporate profits are expected to recover, the economy is likely to maintain a moderate recovery.

The central bank is expected to stand pat on policy at a two-day policy meeting starting on Monday, even as politicians call for another big bang stimulus to shore up the economy.

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Graphic on machinery orders: http://link.reuters.com/bek95s

Graphic on CGPI: http://link.reuters.com/vef36s

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WEAKENING YEN

Japan's Nikkei share average <.N225> broke above 10,000 in early trade on Monday, boosted by another robust U.S. jobs report that pointed to a strengthening U.S. economic recovery and helped to lift the dollar to a nearly 11 month high of 82.64 yen.

The weakening yen may be a source of comfort for Japan's policymakers and exporters, who have struggled with historic gains in the currency since last summer that threatened to derail the recovery from last year's March 11 earthquake.

But a weaker yen could also take its toll on resource-poor Japan by increasing the cost of fuel imports, which have risen following the nearly complete shutdown of its nuclear power sector after the Fukushima disaster.

The weaker yen and higher cost of fuel imports could prolong Japan's trade deficit, gradually depriving it of the ability to finance its massive debt.

Compared with a year earlier, core machinery orders increased 5.7 percent, better than the median forecast for a 4.0 percent annual increase.

Japanese wholesale prices rose 0.6 percent in the year to February, matching the median forecast from economists.

With market jitters easing over Greek debt swap talks, while the yen is weakening and share prices are rising, the central bank is unlikely to move again after last month's surprise easing, sources familiar with its thinking say.

The BOJ surprised markets on February 14 by easing monetary policy with a 10 trillion yen ($123 billion) increase in government bond purchases and set an inflation goal of 1 percent.

($1 = 81.4000 Japanese yen)

(Editing by Edwina Gibbs and Edmund Klamann)

Japan Bank of Japan