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Japan March Core Machinery Orders Surge, Boding Well for Capex

Tomohiro Ohsumi | Bloomberg | Getty Images

Japanese core machinery orders jumped a bigger-than-expected 14.2 percent in March, the quickest monthly pace in eight years, in a sign a weaker yen and surging stock prices are making companies more confident about investing in equipment.

But manufacturers expect core orders, regarded as an indicator of capital spending in the coming six to nine months, to fall in the second quarter, suggesting Prime Minister Shinzo Abe's sweeping stimulus has yet to convince companies to substantially boost spending.

The March increase in core orders, a highly volatile series, was much bigger than a median market forecast for a 2.8 percent gain and followed a revised 4.2 percent rise in February. It also marked the biggest monthly rise in comparable data going back to 2005, the Cabinet Office said on Friday.

(Read More: Hold On, Japan Still Missing Key Pillar of Growth)

"If exports pick up, capital spending will start to take off. We may gradually see companies increasing expenditures from around summer or autumn," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"There's a lot of hope about Abenomics pulling Japan out of deflation. That has led to a weak yen which may boost corporate profits. But companies won't start to increase capital expenditures unless export volumes begin to increase, which hasn't begun yet."

Manufacturers surveyed by the government expect core orders to fall 1.5 percent in April-June from the previous quarter after flat growth in the first three months of this year, the Cabinet Office data showed.

Abe's Plan Shows Results

On a year-on-year basis, core orders increased 2.4 percent in March compared with the median estimate for a 4.1 percent drop.

Japan's economy expanded 0.9 percent in January-March, the fastest growth in a year and outpacing that of the United States, thanks to Abe's policy prescription of huge fiscal spending and aggressive monetary stimulus.

(Read More: Why Weak Yen Remains Wild Card for Japan's Growth)

Abe's policy gamble to beat the country's 15-year long deflation has bolstered share prices and weakened the yen, prompting consumers to spend more and helping boost revenues of export firms.

But companies have been reluctant to increase spending on plant and equipment with the GDP data showing corporate investment, seen as an essential ingredient of a sustained recovery, falling for the fifth straight quarter.

Still, many analysts expect expenditure to gradually pick up as the world's third-largest economy picks up momentum.

The government's aggressive policies to vanquish 15 years of entrenched deflation and revive the economy have sent the Japanese yen sliding to 4-1/2 year lows against the dollar and boosted share prices by 45 percent this year to their highest level since the end of 2007.

(Read More: Japan Government Takes Aim at Electricity Monopolies)

Last month the Bank of Japan unveiled an unprecedented monetary expansion plan, which will inject about $1.4 trillion into the economy in less than two years, and broadly aims to encourage firms to become more active in the economy by investing, hiring and raising wages, creating a virtuous circle that would spur consumer spending and revitalise growth.

Friday's data suggests the policies are beginning to have their desired effect, although the lag effects may mean it will take some time for the evidence to show up on the ground.

Helped by the tailwind of a depressed yen, global-spanning firms such as Toyota earlier this month raised its profit forecast for the current fiscal year as the cheaper currency inflates overseas sales.