Japan Machinery Orders Stronger than Expected

Japan's core machinery orders rose a faster-than-expected 10.4 percent in May, suggesting capital spending was holding up, but economists were cautious about the outlook as soaring costs hurt corporate bottom lines.

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Financial markets showed little reaction to the data as many market players expect the Bank of Japan to stand pat on interest rates for a while. Machinery stocks powered higher on the core orders and the Nikkei 225 Average rose over 1 percent.

"Core orders turned out far stronger than expected, partly because big manufacturers have carried out their capital spending plans which were shown as relatively firm in the latest tankan," said Mamoru Yamazaki, chief economist at RBS Securities.

"Still, I'm not so optimistic about the outlook as corporate profits were falling," Yamazaki said. "As higher raw materials costs further squeeze profit margins, companies will find it more difficult to act positively.

Core private-sector machinery orders, regarded as an indicator of capital spending in the coming six to nine months, rose 10.4 percent in May from the previous month, government data showed on Wednesday.

That compared with a consensus market forecast for a 1.1 percent rise and followed a 5.5 percent rise in April.

Compared with a year earlier, core orders, which exclude those for ships and machinery at electric power firms, rose 5.1 percent against a median forecast for a 3.4 percent decline.

Many economists expect the BOJ to maintain its key target rate at 0.50 percent at least for the rest of the year, even as annual core consumer inflation hit a decade-high 1.5 percent in May on soaring energy and food prices.

That is partly because corporate activity, a key driver of growth, is weakening in the face of rising materials costs and a global economic slowdown, putting the Japanese economy's longest postwar expansion cycle at risk.

The central bank's policy board holds its next policy review on July 14-15.

"The data sends a very neutral sign to the Bank of Japan as it reviews Japan's economic conditions," said Kyohei Morita, chief economist at Barclays Capital Japan.

Japanese business morale sank to a five-year low and big firms responded to their dim profit outlook with the tightest capital spending budgets since 2002, the BOJ's tankan business sentiment survey for June showed last week.

The BOJ has kept monetary policy on hold since raising rates in February last year. It abandoned its tightening bias in April this year on lingering economic uncertainties at home and abroad.