Japan Machine Orders Down, Service Sector Scales Back

The value of Japan's core private-sector machinery orders, a leading indicator of capital spending, hit a record low in May as the services sector scaled back spending in the face of weak domestic demand.

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Bank lending slowed from a record pace in June, separate data showed on Wednesday, partly reflecting an improvement in credit conditions as well as less demand from companies to borrow and invest in capital goods.

Capital spending will likely struggle to recover as doubts about the strength of demand both domestically and abroad mean Japanese companies lack the confidence to boost their spending. The data also suggests that the Bank of Japan could extend measures to support corporate finance beyond their scheduled expiry in September.

"Capital spending will not stop falling until the final quarter of this year," said Azusa Kato, an economist at BNP Paribas. "Orders from non-manufacturers were weak, reflecting concerns over domestic demand. For manufacturers perhaps the worst is over, but exports are unlikely to recover quickly as they did in the previous boom. The BOJ will basically extend corporate funding measures beyond September."

Japan's core private-sector machinery orders fell 3.0 percent in May from the previous month to 668.2 billion yen ($7.05 billion), the lowest level in comparable data going back to April 1987, the Cabinet Office said on Wednesday.The median market forecast was for a rise of 2.1 percent.

Core orders, which exclude those for ships and machinery at electric power firms, fell 38.3 percent in May from a year earlier.
     
Pace Of Deline Slowing

Orders from the manufacturing sector are showing signs of stabilizing, but it may be a while before that translates into higher capital expenditure, a government official said. Weakness in the economy is also spreading to the services sector, so the government left unchanged its assessment that the pace of decline in machinery orders is slowing, the official said.

Manufacturers increased orders by 5.4 percent, the first rise in two months, as car makers, petroleum refiners and general machinery makers raised orders.

Orders from non-manufacturers fell 6.9 percent from the previous month, the third consecutive month of declines, as shipping and insurance companies and the financial sector cut orders, according to the data.

In reaction to the data, 10-year Japanese government bond futures jumped to 138.70, the highest in more than three months, before trading at 138.67, up 0.20 point on the day. The Nikkei 225 Average slid 1.8 percent.

Other data released on Wednesday showed the balance of outstanding loans held by Japanese banks rose 2.4 percent in June from a year earlier, slowing further from a record gain in January as credit conditions eased.

Outstanding Japanese commercial paper held by banks fell 21.8 percent in June from a year earlier after a revised 19.2 percent drop in the year to May, as companies stop hoarding cash.

The BOJ's June tankan survey showed large manufacturers expect their capital expenditure to fall by a record amount in the fiscal year that started in April, highlighting the severity of the environment for corporate spending.

Credit conditions have eased since the BOJ increased purchases of government bonds and started buying commercial paper and corporate debt from last year. However, the improvement has been gradual and BOJ Governor Masaaki Shirakawa is cautious about corporate finance.

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Japan's current account surplus fell 34.3 percent in May from a year earlier, as exports and income gains from investment remained subdued, Wednesday's data also showed. That compared with a median market forecast for a 24.2 percent decline.

Following a record postwar contraction, analysts expect any recovery in Japan to be fragile as many companies slash jobs and cut back on capital spending on weak domestic demand.

Japan's gross domestic product will expand a modest 0.4 percent in April-June, according to a Reuters poll, as companies slowly increase output and government stimulus filters through the economy following a record contraction in the previous quarter.

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