Japan's machinery orders tumbled in July while wholesale prices showed another sharp year-on-year drop as the world's second largest economy struggles with weak domestic demand, data showed Thursday.

Core machinery orders, a leading indicator of corporate capital spending, fell by a sharper-than-expected 9.3 percent in July from the previous month, the Cabinet Office reported.

The result reversed a 9.7 percent jump in June and was much worse than the average market forecast for a fall of 3.5 percent.

Hopes that falls in orders are coming to a halt receded after the latest data, said Monex Securities chief economist Naoki Murakami.

"Production indicators are smoothly recovering and corporate earnings are turning up but this is not necessarily leading to a recovery in investment in plants and facilities," he wrote in a note.

The recent economic data "suggest slack domestic demand continues to weigh on the economy" although higher exports are giving it boost, he said.

The core orders, which exclude particularly volatile demand from power companies and for ships, are seen as a key barometer of business investment.

Hiroshi Watanabe, an economist at Daiwa Institute of Research, said machinery orders were "treading the bottom" almost one year after the collapse of Wall Street giant Lehman Brothers rocked the world economy.

"Exports and production are picking up but their levels are still low compared with before the Lehman shock," he said.

"Factory utilisation rates are still low, making companies feel there is no need to invest in new facilities," he said.

Separate data from the central Bank of Japan on Thursday showed wholesale prices dropped by 8.5 percent in August from a year earlier, matching a record fall posted in July.

Compared with the previous month, the prices of goods traded between companies stayed flat in August, the bank said.

Lower energy costs -- good news for many companies -- are the main reason for the sharp falls in wholesale prices compared with a year earlier, although softer domestic demand is also having an impact, analysts said.

The Japanese economy is still "weak" despite the positive effect of the government's economic packages, with domestic demand staying slack due to the sluggish jobs market and household income, he said.

Japan's unemployment rate rose to a record high of 5.7 percent in July as companies shed workers to cope with the fallout from the worst recession in decades.

Watanabe said month-on-month falls in wholesale prices took a breather as energy prices have turned up recently.

"This is not a good thing for companies if you regard wholesale prices as their cost prices and consumer prices as their sales prices. The current situation means their profit margins are narrowing," he said.

Japan's core consumer prices, which exclude those of volatile fresh food, dropped 2.2 percent in July from a year earlier, the fastest pace on record, according to earlier data.