Japan's rebounding July machinery orders tempered by fragile business outlook

* July core orders rise 6.3% m/m vs forecast +1.9%

* Manufacturers' orders rise 5.0%, service sector orders +3.4%

* Govt keeps assessment on machinery orders unchanged (Adds analyst quote, details)

By Daniel Leussink

TOKYO, Sept 10 (Reuters) - Japan's machinery orders rebounded in July from a sharp fall in the previous month, a welcome relief for the coronavirus-stricken economy but the outlook for capital spending remained uncertain due to fragile global business conditions.

Corporate Japan is facing strains from steep declines in earnings, discouraging business investment as the economy grapples with its worst postwar slump.

Core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, grew 6.3% in July after a 7.6% decline in June.

The rise was bigger than a 1.9% gain seen by economists in a Reuters poll.

"Corporate earnings are likely to remain in a sluggish state in the second half of the fiscal year," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Orders from manufacturers advanced 5.0%, while those from non-manufacturers gained 3.4%, the Cabinet Office data showed on Thursday.

The government maintained its assessment on machinery orders to say they were on a decreasing trend.

Overseas orders rose for the first time in five months, gaining 13.8% in July from the previous month to highlight a pickup in external demand.

From a year earlier, core machinery orders were down 16.2% in July, not far off an expected 18.3% decline.

The world's third-largest economy is preparing for a new prime minister for the first time in nearly eight years after Shinzo Abe announced his resignation last month due to poor health.

The country's next leader will face the daunting task of fighting the economic, social and medical fallout from the health crisis while pulling the country out of its worst postwar recession.

The government has already rolled out a combined $2.2 trillion of fiscal stimulus packages to combat the pandemic, adding to an enhanced programme from the Bank of Japan.

The central bank will hold its next policy review on Sept. 16-17.

Tom Learmouth, Japan economist at Capital Economics, said he still expected non-residential investment to weaken a little further in the third-quarter despite the uptick in July orders.

"With domestic capital goods shipments falling to their lowest level since 2011 in July, we think business investment weakened further in Q3," he wrote in a note. (Reporting by Daniel Leussink Editing by Shri Navaratnam)