(Corrects paragraph 1 to ... yields to rise ..., not ... yields to sink...) (For more stories on the Japanese economy, click)
* Japan ruling party puts up $154 bln stimulus plan - draft
* Green-tinged spending equivalent to 3.1 percent of GDP
* Machinery orders rise due to non-manufacturers
* Exporters still suffer from weak overseas demand
By Sumio Ito
TOKYO, April 9 (Reuters) - The Japanese government should spend a bigger-than-expected 15.4 trillion yen ($154 billion) on economic stimulus, the ruling party said on Thursday, causing bond yields to rise but boosting stocks in sectors seen benefiting from the higher spending.
The new spending should be funded by issuing new bonds, the party said in a draft proposal issued ahead of a major policy speech by Prime Minister Taro Aso later on Thursday and the announcement of the package on Friday.
The stimulus spending -- 3.1 percent of GDP -- is to battle Japan's deepest recession since World War Two, which has slashed exports and corporate profits, prompting firms to cut production and lay off thousands of workers.
Bonds sank because the size of the proposed spending is higher than an earlier mooted level of around 10 trillion yen, traders said, raising the prospect of a large supply of new bonds.
But shares in automakers and solar power-related firms rose after the ruling Liberal Democratic Party proposal for measures to promote the use of solar panels and fuel-efficient cars.
The plan came out as data showed Japan's core machinery orders unexpectedly rose in February due to gains in the services sector, in a tentative sign domestic demand may be stabilising.
Analysts warned, however, that the orders also showed that Japanese exporters continue to suffer, highlighting the challenge the government faces as it compiles additional stimulus measures to combat the worst recession since World War Two.
"Looking at the components, orders from non-manufacturers increased for two consecutive months, showing that domestic demand is starting to turn around. In contrast, external demand is still weak," said Satoru Ogasawara, an economist at Credit Suisse.
Core private-sector machinery orders, a leading indicator of capital spending, rose 1.4 percent in February from the previous month for the first gain in five months. The median market forecast was for a 6.7 percent fall.]
Orders from non-manufacturers rose 3.3 percent in February, while those of manufacturers, hit hard by the slide in exports, fell 8.1 percent.
BONDS FRET, "GREEN" STOCKS RISE
Machinery orders still fell nearly a third from a year earlier but the unexpected uptick added to the weight on bonds from the stimulus package. The benchmark 10-yr yield rose 2.5 basis points to a nearly five-month high of 1.480 percent..
"Extra issuance of around 10 trillion yen is now expected given the size of the stimulus. Not surprisingly the bond market sees this as bearish news," said Tetsuya Miura, chief fixed-income strategist at Shinko Securities.
The LDP urged the government to add 10 trillion yen to a loan guarantee scheme for small businesses and recommended subsidies for environmentally friendly cars and solar panels. Shares in Toyota Motor Corp, maker of the "Prius" hybrid, rose 2.4 percent while those of Mitsubishi Motors Corp, the only mass-volume carmaker with an electric car prototype on the road, climbed 2.8 percent.
Sharp Corp, the world's No.2 maker of solar cells, surged 8 percent while Kyocera Corp, the world's No.4 solar cell maker, climbed 1.9 percent.
The package still faces a potentially stormy ride through parliament, where the opposition controls the upper house and can stall legislation.
Aso has threatened to bring forward an election due by October this year if the opposition stalls the package.
The package would add to spending of 12 trillion yen already planned under previously announced stimulus measures, taking the total stimulus spending to combat the global financial crisis to around 5.5 percent of GDP.
The Japanese economy shrank 3.1 percent in October-December from the previous quarter and is expected to have shrunk a further 2.5 percent in January-March.
The contraction is bigger than in other major economies, despite Japan's banking system being among the least damaged by the credit crisis, because of the country's reliance on exports of cars and electronics. (Additional reporting by Leika Kihara, Shinichi Saoshiro and Stanley White; Writing by Rodney Joyce)