Japan core machinery orders fall in March, capex recovery seen intact

Heavy machinery is seen at a construction site in Tokyo June 8, 2016. ― Reuters pic
Heavy machinery is seen at a construction site in Tokyo June 8, 2016. ― Reuters pic

TOKYO, May 17 ― Japan's core machinery orders fell in March for the first time in three months, but manufacturers forecast a rise for April-June, suggesting capital expenditure could hold up despite news that the economy contracted in the first quarter.

The 3.9 per cent fall in core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, compared with a 3.0 per cent drop seen by economists in a Reuters poll, Cabinet Office data showed today.

Manufacturers surveyed by the Cabinet Office forecast that core orders will rise 7.1 per cent in April-June, after rising 3.3 per cent in the previous three months and up for a third straight quarter.

“The upshot is that non-residential investment should remain a key growth driver this year,” said Marcel Thieliant, senior Japan economist at Capital Economics.

The machinery orders data follows a gross domestic product (GDP) report out yesterday showing that the world's third-largest economy contracted an annualised 0.6 per cent in January-March, ending an uninterrupted eight-quarter expansion and suggesting growth may have peaked.

The GDP data also showed capital expenditure declined 0.1 per cent in January-March, falling for the first time in six quarters.

While many economists see the economy returning to growth this quarter led by exports, capital expenditure is also expected to be underpinned by factory automation and demand for labour-saving technologies to cope with labour shortages.

“Autonomous recovery in capital expenditure is in place as the Bank of Japan's latest tankan survey suggested. I don't think an uptrend in business investment backed by exports and domestic labour shortages has changed at all,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Still, potential fallout from Sino-US trade frictions and protectionist US policies cloud the outlook for Japan's capital expenditure and export-reliant economy, especially if Japanese products become target of US criticism, Minami said.

The two economic powerhouses ― and Japan's major trading partners ― have threatened each other with heavy tariffs amid US disapproval of China's trade practices and its treatment of US intellectual property.

The Cabinet Office stuck to its assessment that machinery orders are picking up.

By sector, orders from manufacturers declined 17.5 per cent in March, down for the first time in three months, the data showed.

Service-sector orders increased 2.2 per cent, up for a third straight month.

Overseas sales of machinery, which are not counted as core orders, fell 7.2 per cent in March, down for two months in a row.

Compared with a year earlier, core orders, which exclude those for ships and from electric power utilities, declined 2.4 per cent in March, the data showed. ― Reuters

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