UPDATE 3-Strong Japan machinery orders a shot in the arm to Abenomics

Thu Jan 16, 2014 2:38am EST

* Nov core machinery orders up 9.3 pct vs f'cast +1.2 pct

* Govt revises up assessment on machinery orders

* BOJ Kuroda repeats economy to keep recovering moderately

* Strong data may allow BOJ to stand pat for now-analysts

By Leika Kihara

TOKYO, Jan 16 (Reuters) - Japan's core machinery orders jumped to a five-year high in November, a sign companies may be ready to ramp up investment and increase wages - key elements in Prime Minister Shinzo Abe's strategy to revive the world's third-biggest economy.

The upbeat data is likely to ease concerns about capital expenditure, a weak link in an otherwise robust economy, and may allow the Bank of Japan to hold off on expanding its monetary stimulus any time soon, analysts said.

"We can expect capital expenditure to increase significantly, with the weak yen bolstering corporate profits and the economic outlook brightening," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"This is pretty positive news for the BOJ as it reduces one source of concern about the economy. The chance of an early easing has decreased," he said.

Core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, jumped 9.3 percent in November from the previous month, data showed on Thursday. That was the fifth biggest rise on record and blew past a median market forecast for a 1.2 percent increase.

The value of core orders, at 882.6 billion yen ($8.5 billion), was the biggest in more than five years, prompting the government to raise its assessment to say orders are "increasing as a trend."

Abe's plan - dubbed "Abenomics" - is to combine fiscal spending, economic reforms and monetary stimulus to pull Japan out of a decades-long economic slump. His efforts have already paid dividends with Japan's economic growth outpacing its G7 counterparts in the first half of last year.

BOJ Governor Haruhiko Kuroda maintained his upbeat view on the economy, saying it will continue a moderate recovery despite the likely pain from a sales tax hike in April.

"Japan's economy is making steady progress toward achieving the BOJ's 2 percent price target," Kuroda told a quarterly meeting of the bank's regional branch managers on Thursday.

In a sign the recovery is broadening, the BOJ revised up its assessment for five out of nine regional economies, citing robust consumer spending as companies increase hiring or wages.

SO FAR SO GOOD

Many officials in the government and the central bank view capital expenditure as an essential component of economic growth because it can spur job creation, which could lead to higher wages and stronger consumer spending.

Companies have been slow to expand investment, so signs that capital expenditure will increase this year would be a positive for the growth outlook, helping to quicken progress toward ending years of grinding deflation.

Deflation has encouraged companies to sit on their pile of cash rather than spend on wages or investment. Even companies who do plan to invest did so overseas, lured by lower costs and demand in emerging nations.

If domestic demand sustains its momentum, however, this trend may change.

Encouragingly, anecdotal evidence of an uptick in capital expenditure is already starting to emerge.

Toshiba Corp, Japan's largest computer chipmaker, is earmarking 30 billion yen to expand a building that houses one of its NAND memory chip factories in western Japan, with construction to be completed around summer.

Toshiba's Chief Executive Officer Hisao Tanaka told Reuters in October that the company would make a decision on potential spending of up to another 400 billion yen on equipment for the plant by March.

"As corporate revenues improve, capital expenditure is clearly picking up even among manufacturers, which have been slow in increasing spending," Shigeki Kushida, the head of the BOJ's Osaka branch, told reporters on Thursday. He oversees the Kinki region of western Japan, home to several electronics giants.

Thursday's data showed retailers boosting spending on orders in a sign they may be opening new stores and buying new equipment on hopes of robust consumer spending. For example, Japan's biggest convenience store operator Seven-Eleven Japan Co plans to open 1,600 shops in its fiscal year that begins in March, compared with 1,500 in the current one.

BOJ REVIEW NEXT WEEK

The data may also dispel market speculation that the BOJ will ease again soon to pre-empt an expected downturn in the economy from the April tax hike.

Many analysts expect the central bank to keep monetary policy steady at its rate review next week as evidence builds that Japan is making steady progress toward beating deflation.

Wholesale prices rose 2.5 percent in December from a year earlier, increasing for the ninth straight month. Core consumer inflation also hit 1.2 percent in November, passing the halfway mark towards the BOJ's price target.

The BOJ stunned markets by delivering an intense burst of monetary stimulus in April last year, pledging to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases in a country mired in prolonged deflation.

Kuroda has repeatedly said the BOJ will not act just to counter the pain from the tax hike, unless the damage proves to be far bigger than expected.

Japan's economy slowed in the third quarter on soft exports and capital spending. Analysts expect the economy to pick up again as consumers try to beat the sales tax hike, although some worry about the damage from the higher tax later this year.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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