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Japan's surprise decline in machinery orders raises doubts about business spending

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11/10/2019 | 08:40pm EST
FILE PHOTO: Heavy machinery is seen at a construction site in Tokyo

Japan's machinery orders fell for a third straight month in September, raising doubts that business spending will be strong enough to offset external pressures, which have clouded the outlook for the export-reliant economy.

Capital spending has been a bright spot for the world's third-largest economy, driven by refurbishing of aged infrastructure, urban development, automation and investments to cope with a labour crunch in the rapidly ageing population.

Policymakers are counting on solid capital expenditure and domestic demand to prop up growth amid the U.S.-China trade war, a broader global slowdown and the impact from last month's sales tax hike.

Core machinery orders fell 2.9% in September from the previous month, down for a third straight month and dashing expectations for a 0.9% increase in a Reuters poll, Cabinet Office data showed on Monday.

"The continued fall in machinery orders suggests that the recent strength in capital goods shipments won't last," said Marcel Thieliant, senior Japan economist at Capital Economics. "Firms have scaled back their investment spending plans as capacity shortages have diminished."

The core machinery orders data, which exclude those from shipbuilders and power utilities, is a highly volatile series but regarded as a key indicator of capital spending.

By sector, manufacturers' orders dropped 5.2%, dragged down by non-ferrous metals and transport machinery, while the service sector grew 2.6%, led by information and communications.

Manufacturers surveyed by the Cabinet Office forecast that core orders will rise 3.5% in October-December, after a 3.5% decrease in the previous quarter.

Data on Thursday is likely to show Japan's economic growth slowed to an annualised 0.8% in July-September from 1.3% in the second quarter, a Reuters poll found last week.

The capital spending component of GDP likely rose 0.9% quarter-on-quarter in July-September after a 0.2% gain in April-June.

The Cabinet Office cut its assessment, saying a pick-up is seen stalling in machinery orders.

Prime Minister Shin Abe on Friday ordered his cabinet to compile a package of stimulus measures to cope with external risks and large natural disasters, and prepare against a potential economic slump after the 2020 Tokyo Olympics.

Recent data, including retail sales and household spending, suggested consumers went on a last-minute shopping spree in September to beat the sales tax hike to 10% from 8%, raising some worries about a subsequent pullback in demand.

Policymakers have argued that the economy would likely avoid a repeat of the previous tax hike from 5% in April 2014 that caused a big downward swing in the economy.

By Tetsushi Kajimoto

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