By Tetsushi Kajimoto

TOKYO (Reuters) – Japan’s key gauge of capital spending grew much stronger than expected in February, rebounding sharply from the prior month’s decline in a welcome sign for domestic demand even as the yen’s slide against the dollar raises the cost of living.

Core machinery orders rose 7.7% in February from the previous month, blowing past a 0.8% increase expected by economists in a Reuters poll and more than recouping a 1.7% fall in January, the Cabinet Office data showed.

Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, declined 1.8% in February, compared with a 6.0% drop seen by economists.

Brisk capital spending should ease concerns about weak domestic demand as government and central bank policymakers try to stoke a virtuous growth cycle led by durable consumption and solid wages.

Japanese firms have come up with strong plans for investment in plants and equipment in recent years, but uncertainty over the economic outlook has caused delays in implementing those plans.

The core orders data was released amid a backdrop of concerns around persistent weakness in the yen.

The Japanese currency slumped to 34-year lows against the dollar beyond 153 yen last week, which could boost import prices and add to already stiff cost-of-living pressures.

Last month, the Bank of Japan ended negative interest rates in a landmark shift away from its decade-long super-easy accommodative policy after major firms offered big pay raise at annual wage talks in mid-March.