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Japan Machinery Orders Clock Fastest Rise in 2 Years

Wednesday, 10 Apr 2013 | 9:28 PM ET
Bloomberg | Getty Images

Japan's machinery orders rose in February at the fastest pace since mid-2011 in a sign that capital expenditure could pick up this year as business confidence is boosted by government and central bank efforts to end deflation.

Core machinery orders, which help to gauge the strength of capital spending, rose 7.5 percent in February from January, data from the Cabinet Office showed, stronger than the median estimate of 6.8 percent in a Reuters poll.

Capital expenditure could start a sustainable increase from the middle of the year, economists say, as it will take some time before the steps the Bank of Japan and the government are taking to end deflation starts to have an impact on spending.

(Read More: Japan Current Account Swings to Surplus, Finally)

"We've bottomed out, but it will take more time for capex to pick up," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

"Many companies are reviewing their plans for this fiscal year. Since sentiment is improving due to Prime Minister Shinzo Abe's policies, capital expenditure could start to improve, perhaps around June."

The rise in February was the largest since core machinery orders rose 7.7 percent in June 2011.

Machinery orders have been volatile in recent months, falling 13.1 percent in January after rises of 2.8 percent and 3.9 percent at the end of 2012.

(Read More: Why Are Japan's Manufacturers So Bearish?)

Manufacturers have been cautious with their capital expenditure plans due to worries about a slow recovery in exports, but a weak yen and improving consumer sentiment could encourage companies to invest more in plant and equipment.

Compared with a year earlier, core orders, which exclude those for ships and electric power utilities, fell 11.3 percent, versus the median estimate for a 7.6 percent decline.

Wholesale prices fell 0.5 percent in the year to March, separate data from the Bank of Japan showed. That compared with the median forecast for a 0.4 percent annual decrease.

The BOJ agreed last week a radical overhaul of monetary policy that will double the amount of government debt the central bank holds over the next two years to spur inflation expectations and end 15 years of nagging deflation.

(Read More: BOJ Throws In Kitchen Sink in War With Deflation)

The BOJ, under new Governor Haruhiko Kuroda, wants to raise inflation expectations so as to boost consumer spending and encourage capital consumption, leading to a virtuous circle that pushes consumer prices higher.

Abe's strategy is to combine massive monetary easing with fiscal stimulus and structural reforms to jumpstart the economy.

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