* Machinery orders fall smaller than expected 1.3 pct
* Companies see further falls in orders in second quarter
* Finance Minister Yosano says too early to call a recovery
* BOJ may consider upgrade in view on economy, sources say
By Stanley White
TOKYO, May 15 (Reuters) - Japanese machinery orders fell in March in a sign that companies are still reluctant to spend despite signs that the recession may have hit bottom.
Rebounds in exports and production suggest the export-driven economy likely reached a trough in the January-March period, and economists forecast a return to growth in the following quarter.
That may prompt the Bank of Japan to be less pessimistic in its assessment of the economy this month, sources with knowledge of the matter said, although global weakness means it is unclear how sustainable any return to growth would be.
"We can see inventory adjustments helping manufacturers and some improvement in sentiment," Finance Minister Kaoru Yosano told reporters. "However, it is too early to say Japan is on a recovery path."
Companies themselves forecast machinery orders to fall in the second quarter, in another sign that Japan's big manufacturers of cars, technology and other exports are not confident enough to restore capital expenditure, which they slashed in the wake of the financial crisis.
"Although there have been some signs of improvements in output and sentiment, the machinery orders data showed capital spending is likely to remain weak," said Junko Nishioka, chief economist at RBS Securities.
Friday's data showed Japan's core private-sector machinery orders fell 1.3 percent in March, wiping out a 0.6 percent rise in February, but it was a much smaller decline than the median market forecast for a 4.5 percent slide.
The smaller-than-expected fall helped the benchmark Nikkei share average rise 1.9 percent, as machinery maker stocks gained on hopes that the worst of the declines in corporate spending might be over.
BOJ LESS DOWNBEAT?
The BOJ may upgrade its assessment after March industrial production rose from the previous month for the first time in six months and companies forecast their output to rise in April-June, sources said. The BOJ hasn't turned optimistic on the economy as policymakers still expect a recovery to come slowly and the outlook for the global financial system is unclear, sources said.
Japan's central bank might go as far as suggesting the economy was hitting bottom or perking up, or it might simply drop the word "sharply" from its previous assessment that the economy was deteriorating sharply, the Nikkei business daily said.
BOJ Governor Masaaki Shirakawa said on Wednesday the Japanese economy was showing signs of recovery and was expected to stabilise towards the end of this year.
The global slowdown has hit Japan's huge manufacturers hard as customers lower investment and consumers in the United States and Europe cut back spending.
Tokyo Electron Ltd, the world's second-largest chip equipment maker, forecast on Thursday a record loss for the year to next March.
While there is hope that the worst may be over as exports stabilise after almost halving in the past year, analysts expect any recovery in the world's No.2 economy to be fragile as job cuts hit domestic demand and capital investment remains subdued.
Manufacturers surveyed by the Cabinet Office forecast core machinery orders, a highly volatile indicator of capital spending in the coming six to nine months, to fall 5.0 percent in the second quarter -- the fifth straight quarter of decline.
For a graphic tracking machinery orders against industrial production and capex spending, click:
http://graphics.thomsonreuters.com/059/JP_MCH0509.jpg
Falling consumer prices mean Japan has dipped into its second bout of deflation this decade, with debate over whether this will be mild or more persistent.
Persistent deflation prompts consumers to hold off spending, raising the prospect of a downward spiral as companies cut prices further to try to win sales.
Data on Friday showed Japanese wholesale prices fell 3.8 percent in April from a year earlier, their fastest annual decline in 22 years as weak domestic demand adds to commodity price declines, but it is not clear how much of that will feed into consumer prices.
"The trend of falling is priced in and the central bank is more focused on the outlook for the economy," said Tetsuro Sawano, a senior strategist at Mitsubishi UFJ Securities. (Editing by Rodney Joyce)