Japan Machinery Orders Jump But BOJ Seen on Hold


Japan's core private-sector machinery orders jumped in July, but not enough to ease investors' concerns that the turmoil in global markets may yet unsettle the Japanese economy.

Core machinery orders, a highly volatile figure regarded as a leading gauge of capital spending, rose 17.0% in July from June, government data showed. That was far above economists' median forecast for a 5.3% increase.

"The data confirmed there's no change to the upward trend in capital expenditure growth," said Naoki Iizuka, senior economist at Mizuho Securities. "But it won't affect the Bank of Japan's monetary policy much as the central bank is focusing more on downside risks to the economy now. Unless the U.S. subprime problem is resolved, I don't think the BOJ can raise interest rates."

Markets reacted little to the data. The U.S. dollar was little changed against the yen from around 113.45 yen before the data's release. The Nikkei 225 Average opened up 0.15%, before sliding into negative territory.

"We need to bear in mind that the large gain comes after a sharp fall the previous month, but the strong machinery orders, supported by both manufacturers and nonmanufacturers, confirmed that capital spending is on a firm footing," said Hiroshi Shiraishi, economist at Lehman Brothers Japan.

Many economists have said the strain in global markets is unlikely to have a big impact on Japan, but surprisingly weak U.S. payrolls data last week sparked fears Japan may suffer if consumers in its top export market stop buying cars and flat-screen TVs.

Revised data on Monday showed Japan's economy contracted 0.3% in the April-June quarter due to weak capital spending.

The market mess and weak GDP mean the consensus is that the Bank of Japan board members who set rates will sit on their hands for a while longer, keeping their key rate at 0.5%.

"The (machinery orders) data merely supports the BOJ's scenario that low interest rates underpin capital spending, but it does not boost rate expectations. I expect the BOJ to raise rates in November," said ABN Amro economist Junko Nishioka.

Swap contracts on the overnight call rate, the Bank of Japan's policy target, are only pricing in around a 30% chance of a rate hike by the end of this year.

Just a month ago, a hike to 0.75% from 0.50% some time in the July-September quarter was seen as a done deal.

"Orders were boosted by big projects at a railway operator and a mining company. Given such special factors, they could fall in August in reaction," said an official at the Cabinet Office.

For the July-September quarter, the Cabinet Office said orders will rise 10.7% if they are flat in both August and September.

The ministry said in August that core orders, which exclude those for ships and machinery at electric power firms, were likely to rise 3.7% in July-September from the previous quarter.

Although core orders have been soft in the past year, many economists have said firms are keen to spend on other facilities such as buildings, keeping overall capital spending firm.

Government data showed last week that Japanese firms cut capital spending by 4.9% in April-June from a year earlier, the first decline in 17 quarters.

The Bank of Japan has pledged to gradually raise interest rates, now at 0.5%, fearing that keeping rates at such low levels for too long could sow the seed of excessive investment.