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Japan June Machinery Orders Falls Less Than Expected

Reuters
Thursday, 7 Aug 2008 | 3:23 AM ET

Japan's core machinery orders fell much less than expected in June, suggesting that capital spending has not been hurt too badly so far by high raw material costs and a global slowdown that are pushing Japan towards a recession.

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But manufacturers surveyed by the government said they expected orders to decline in the third quarter, reinforcing the recession outlook and a belief that Japan's interest rates will be kept at their current low levels for a while.

"The latest reading is not so bad given deteriorating external conditions," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan.

"As companies, mainly large corporations, have solid balance sheets, a deterioration in external conditions does not lead straight to a fall in capital spending."

Core orders, a highly volatile series regarded as an indicator of capital spending in the coming six to nine months, fell 2.6 percent in June, only around a quarter of the 9.6 percent drop expected by economists.

The core orders were supported by sectors such as shipbuilding, transport and communications, while the steel, electric machinery and financial sectors dragged them down.

For the April-June quarter, orders were up 0.6 percent, marking the fourth straight quarter of growth -- easing some of the concerns about second-quarter GDP figures due next week that economists expect to show the economy is contracting.

Recession Fears

Most economy watchers, including government officials, say Japan is either heading into or already in a recession, as Japan defines the term.

Japan measures a recession as a downturn in the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction.

Reinforcing that view, manufacturers surveyed by the Cabinet Office forecast a 3.0 percent fall in core orders, which exclude those for ships and machinery at electric power firms, in the current quarter to September.

The government kept its assessment on machinery orders unchanged, saying they have been weakening recently.

That bodes ill for the outlook for capital spending, a key driver of Japan's longest postwar expansion, which looks to have ended.


"With exports falling and corporate earnings not good, we're seeing negative factors for the outlook for capital expenditure," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Japan's economy will gradually continue to worsen at least for the rest of this year. The Bank of Japan is saying monetary conditions are still accommodative, but it won't be able to raise rates for quite a long time."

The Cabinet Office said on Wednesday the economy was "deteriorating", adding that its provisional judgment was that Japan is likely in a recession, after an index of economic indicators sank in June.

Preliminary gross domestic product data for April-June, due on Aug. 13, is expected to show the economy contracted 0.6 percent, a Reuters poll shows.

The BOJ's tankan quarterly corporate survey released last month showed corporate capital spending plans for this time of year were the weakest in six years.

The central bank is expected to keep interest rates on hold at 0.5 percent when its policy board holds a two-day meeting from Aug. 18.