Japan machinery orders at 7-year high in boost to economic outlook

Japanese food machinery maker Aichi displaying a pancake making machine at an exhibition in Tokyo.
Japanese food machinery maker Aichi displaying a pancake making machine at an exhibition in Tokyo. PHOTO: AFP

TOKYO (REUTERS) - The value of Japan's core machinery orders rose to a 7-year high in May and were up for the third-straight month, adding to recent evidence of a steady pick-up in spending by firms and raising hopes of a more durable economic recovery.

Thursday's data and a key central bank survey last week suggest Corporate Japan is finally starting to buy into Prime Minister Shinzo Abe's radical 'Abenomics' stimulus policies aimed at sparking sustainable growth in the world's third-largest economy.

The 0.6 per cent rise in core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, beat economists' median estimate of a 5.0 per cent drop, Cabinet Office data showed.

The Cabinet office said the value of core orders, which exclude those of ships and electric power utilities, reached its highest levels since June 2008.

"Machinery orders turned out pretty strong. That indicates a positive trend for capital spending for the time being," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.

Japanese firms had long been hesitant to boost capital spending despite ultra-low borrowing costs made possible by years of loose money policies from the Bank of Japan.

Policymakers are eager for firms to invest their earnings in plant and equipment, hoping for a virtuous cycle of investment, higher wages and consumption to revitalise the economy.

Recent signs suggest that firms may be changing their cautious investment approach. Last week's BOJ quarterly tankan survey showed big companies plan to boost capital expenditure at the fastest pace in a decade in the current fiscal year to March 2016.

Record profits and ample cash have encouraged companies such as industrial robot maker Fanuc Corp to increase capital investment. Even Sony Corp, which is struggling with weak sales of mobile and other gadgets, is boosting investments in areas such as sensors and videogames.

Moreover, despite worries over the Greek debt crisis and a slowdown in China - Japan's biggest trading partner - higher corporate spending promises to bolster growth from an expected slowdown in the second quarter.

"We believe that business investment will remain the bright spot in terms of economic growth in coming quarters," said Marcel Thieliant, economist at Capital Economics.

The BOJ is expected to sit tight when it meets to review policy next week, but many analysts expect the bank to be forced into deploying additional stimulus later this year as inflation is seen struggling to accelerate towards its ambitious 2 per cent target.