Japan core machinery orders rebound in July, may signal capex recovery

By Tetsushi Kajimoto

TOKYO (Reuters) - Japan's core machinery orders rose in July at the fastest pace since January 2016, rebounding from a third straight month of falls and an encouraging sign of the increased capital investment needed for sustained economic recovery.

The 8.0 percent rise in core orders, which exclude ships and orders from electric power utilities, virtually doubled the 4.4 percent increase expected by economists in a Reuters poll. It followed a 1.9 percent decline in June.

Orders from manufacturers rose 2.9 percent in July, driven by railway cars, while service-sector orders grew 4.8 percent, led by computer equipment, Cabinet Office data showed on Monday.

 

Machinery orders - a leading indicator of capital expenditure - are highly volatile and analysts warn against reading too much into the monthly data. Nonetheless, Monday's news is likely to ease concerns about capital expenditure, which has lacked momentum lately with companies hesitant to spend despite record cash holdings.

"The declines in core orders until the previous month have been contrary to our view that capital expenditure is in a gradual uptrend, so the reversal is a relief," Hidenobu Tokuda, senior economist at Mizuho Research Institute, said.

"Core orders may fluctuate from now but the broader trend is that the current high level of orders will be kept," he said, adding that a potential slowdown in China - Japan's key trading partner - would be a risk to the outlook.

Overseas orders, which are not counted as core orders, grew 9.1 percent month-on-month in July, reversing from the previous two months' declines, led by big-ticket orders including ships, railway cars, motors and computers.

Government data showed last week that Japan's economy, the world's third largest, grew much less quickly in the April-June quarter than initially estimated due to a sharp reduction in corporate capital spending.

The Cabinet Office stuck to its assessment of machinery orders, which it described as "stalling". An official said the government would need to see more data in coming months before changing that assessment.

Analysts expect capital expenditure to pick up gradually, backed by refurbishing and infrastructure investment for the 2020 Tokyo Olympic Games and spending on labour-saving equipment as well as low borrowing costs stemming from the Bank of Japan's negative interest rate policy.

A sustained recovery in business expenditure should support the central bank's view that a virtuous circle of private sector-led growth will take hold in the economy.

Still, wages and inflation remain stubbornly low despite recent signs of rebounding private consumption, keeping the BOJ under pressure to maintain its massive monetary stimulus.

(Reporting by Tetsushi Kajimoto; Editing by Eric Meijer)