Japan's core machinery orders posted their biggest quarterly fall in a decade in July-September and manufacturers expect only a small rebound in the last quarter of the year, boding ill for capital investment as the economy teeters on the brink of recession.
Major Japanese companies including the world's biggest automaker Toyota Motor have been slashing their earning forecasts, adding to speculation that the Bank of Japan could cut interest rates again as the fallout from the global credit crisis spreads.
"It is apparent that Japanese firms are losing their appetite for fresh investment in the face of falling profits and weakening overseas demand and production," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.
Core orders, which excludes those for ships and machinery at electric power firms, fell 10.4 percent in July-September from the preceding three months, matching a record low in April-June 1998, government data showed.
A 5.5 percent rise in core orders in September was not enough to offset falls in the previous two months, government data showed.
Manufacturers forecast that core orders would rise 1.2 percent in October-December from the big drop in July-September.
But economists say actual orders could fall short of this estimate due to expected further economic weakness that is adding to the view that the BOJ could rates again after a cut to 0.3 percent from 0.5 percent last month.
"There is quite a big risk that manufacturers' core orders will fall below their forecast in October-December, given Japan's economy is worsening significantly. Companies have abundant cash flow but they are in no rush to invest," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"The Bank of Japan could cut interest rates again early next year if markets become volatile."
The Nikkei 225 Average rose more than 5 percent on Monday as a
weaker yen and hopes for U.S. President-elect Barack Obama's economic plans lifted sentiment.
Machinery orders have tumbled since summer as a growing number of Japanese companies suspend and postpone capital spending in the face of the turmoil in the global economy.
Toyota, the world's No.1 automaker, shocked investors last week by announcing a 63 percent cut in operating profits this financial year.
Toyota's revision epitomizes the burden the Japanese economy is facing such as weakening consumption in key export destinations, sluggish domestic sales and a strong yen.
More From CNBC.com ...
- G20 Sees More Action, China to Boost Economy
- Economy's Illness Will Keep Spreading
- Credit Spreads and Libor Data
- Futures and Pre-Market Data
Japan's economy shrank at the fastest pace in seven years in April-June, and some economists think it may have contracted again in the three months that ended in September, although the median forecast is for growth of 0.1 percent.
Conditions look set to get worsen in coming months as the world economy, which Japan's export-driven economy relies on heavily, is now reeling from the financial problems in the United States and Europe.