Japan's extended fall in machinery orders bodes ill for business spending

Core machinery orders fell 6.0 per cent in October from the previous month, down for a fourth straight month. PHOTO: REUTERS

TOKYO (REUTERS) - Japan saw another decline in machinery orders in October in a fresh sign business spending, one of the few points of strength in the world's third-largest economy, is stalling as slumping exports bruise investment appetite.

Core machinery orders fell 6.0 per cent in October from the previous month, down for a fourth straight month and dashing expectations for a 0.9 per cent increase in a Reuters poll, data showed on Thursday (Dec 12).

The decline marked the longest period of month-on-month contraction since a similar stretch to January 2009 and throws up a challenge for policymakers counting on solid business spending to support demand amid a global slowdown.

"Companies are becoming increasingly cautious in regard to investment," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

"The impact from the sales tax hike seems to be larger than was expected."

The core machinery orders data is a highly volatile series but regarded as a key indicator of capital spending in the coming six to nine months.

Capital expenditure has been a rare positive for the economy over the past two quarters as companies invest in new equipment and automation.

Japan's economy expanded at a faster pace than initially reported in the third quarter largely thanks to improvements in business spending as well as private consumption.

However, the drop in orders suggests Japanese manufacturers are increasingly cautious about their spending amid weakening demand, due in large part to slowing growth in China and the damaging Sino-U.S. trade war.

"It's hard to read the economy while going into next year," said Shigeaki Kato of Orion Industry Corporation, a small high-precision manufacturer in Tokyo's downtown Arakawa area.

"My feeling is half-half. The semiconductor industry is still sluggish," he said a day before Thursday's release.

GROWTH DRIVER

Some analysts say the third quarter strength masked fragility that could lead to future weakness, as a sales tax hike in October - the first in more than five years - slows consumption, one of the economy's main growth drivers.

Recent data, including retail sales and household spending, suggested consumers tightened their purse strings following the sales tax hike.

That could prompt the central bank to offer a bleaker assessment on factory output than in October at its rate review next week.

The export slump is also expected to slash Japan's tax receipts for the current fiscal year to more than 2 trillion yen (S$25 billion) below the government's initial target, a major blow to efforts to tighten public finances.

By sector, manufacturers' orders dropped 1.5 per cent, dragged down by production machinery and information and communications, while core orders from the service-sector fell 5.4 per cent, led by agriculture, forestry and fisheries.

Adding pressure to the sector were a typhoon and heavy raise that caused disruptions in the supply chain and production, which also hit firms willingness to spend.

Compared with a year earlier, core orders, which exclude those of ships and electricity, dropped 6.1 per cent in October, falling at a faster pace than a 1.8 per cent contraction seen by economists in a Reuters poll.

Japan's cabinet approved a US$122 billion (S$165.5 billion) fiscal package last week to support stalling growth amid the outlook risks and as policymakers look to sustain activity beyond the 2020 Tokyo Olympics.

The Cabinet Office cut its assessment of the sector, saying machinery orders were "seen stalling", compared with the previous month's assessment that said the pick-up in orders was seen at a standstill.

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