Japan March Machinery Orders Are Surprisingly Weak

Japanese machinery orders fell unexpectedly in March, rekindling concerns that companies' capital spending may be losing steam and knocking down the yen and Tokyo share prices.

Core private-sector machinery orders, a highly volatile series regarded as an indicator of capital spending in the coming six to nine months, fell 4.5% in March from the previous month, government data showed on Tuesday.

That was far short of economists' median forecast for a 1.3% rise and followed a revised 5.2% decline in February.

The surprise weakness in machinery orders reinforced views that the Bank of Japan may have to wait a while longer before raising interest rates further.

The March decline was led by lower orders from the power, telecoms, textile and general machinery industries, a government official told reporters.

Worse still, manufacturers surveyed by the Cabinet Office forecast that core orders, which exclude those for ships and machinery at electric power firms, will fall 11.8% in the April-June from the previous quarter.

"The data does look weak. It coincides with the view that capital investment is slowing," said Takuji Aida, chief economist at Barclays Capital.

The yen slipped on the data to around 120.50 against the dollar from around 120.35 yen just before the release. The Nikkei 225 Average was down in the early morning session.

The weak reading also led the government to downgrade its assessment. It said machinery orders are somewhat weak. For January-March, orders decreased 0.7%.

Struggle to Rise

Machinery orders have been soft since the middle of last year. After their steady rise was snapped by a sudden, sharp drop in the July-September quarter they have struggled to rise.

But some economists said the outlook for orders may not be as bad as the data suggests because companies tend to make very cautious forecasts in March.

"We should also note that in March, when the Japanese business year ends, companies do not know clearly how many orders they will receive in the new financial year, so they tend to be cautious," said Yasuo Yamamoto, a senior economist at Mizuho Research Institute.

"In fact, in the past three years, the actual orders have overshot the forecast. Last year, it was 11.9% above the original forecast. Still, orders will be flat in this April-June quarter at best," he added.

Many economists also said the Bank of Japan's tankan survey of business sentiment showed last month that Japanese companies are willing to boost capital spending.

Economics Minister Hiroko Ota also said the tankan suggested the outlook for capex is strong but that the weak forecast for machinery orders was worrying. The data came two days before the release of gross domestic product data for the first three months of this year.

Economists expect the world's second-largest economy to have expanded 0.7% in January-March from the previous quarter or an annualised 2.7%.

That would be the ninth straight quarter of expansion, following growth of 1.3% in the final quarter of last year from the previous quarter or 5.5% annualized, which was the fastest in three years.

Coinciding with the GDP data, the BOJ will end a two-day policy meeting on Thursday at which the central bank is widely expected to keep the key overnight call rate target unchanged at 0.5 percent amid tame inflationary pressure.