UPDATE 3-Japan Q2 machinery orders plunge; weak outlook challenges policymakers

Thu Aug 14, 2014 12:23am EDT

Related Topics

* June core orders +8.8 pct m/m vs +15.3 pct forecast
    * Core orders -10.4 pct in Q2, seen +2.9 pct in Q3
    * Data suggests firms lack growth conviction
    * Capex the key to sustained economic recovery

 (Adds more details, context on trends)
    By Tetsushi Kajimoto
    TOKYO, Aug 14 (Reuters) - Japan's core machinery orders tumbled in
April-June at their fastest since the last global financial crisis and only a
modest rebound is seen in the current quarter - further challenging policymakers
contending with a fragile economy.
    The highly volatile data point, a key indicator of capital spending,
followed news on Wednesday that the economy suffered its biggest contraction
since 2011 in the second quarter as April's sales tax hike took a heavy toll on
private consumption.
    With exports and factory production weakening, policymakers had hoped
business investment would drive a virtuous cycle of output, income generation
and consumption, but Thursday's anaemic numbers cloud the outlook for sustained
growth.
    Cabinet Office data out on Thursday showed core orders fell 10.4 percent in
April-June from the previous quarter, marking the first slide in five quarters
and the sharpest drop since January-March 2009 when orders declined 12.3
percent.
    Companies surveyed by the Cabinet Office forecast that core orders would
rise 2.9 percent in July-September.
    Orders at manufacturers and service-sector firms fell 8.5 percent and 6.7
percent in April-June respectively. Manufacturers see orders falling 0.5 percent
in the current quarter, while service-sector firms expect a 2.2 percent gain.
    Companies held off spending in April-June after boosting investment earlier
this year, likely to meet demand related to upgrading Windows operating systems
and tighter regulation on diesel vehicle emissions that kicked in from April,
government officials said.
    As the temporary factors run their course, analysts expect capital spending
will be picking up from now on due to steady corporate earnings and the need for
upgrades of ageing equipment, particularly among non-manufacturers, although the
pace of recovery is likely to be moderate.
    "The data suggests that any recovery in capital spending will be slack. What
is lacking in Japan is companies' confidence in a growth outlook rather than
inflation expectations," said Kyohei Morita, chief Japan economist at Barclays
Capital.
    "Japan must act quickly to implement its growth strategy, tackling issues
such as cuts in the corporate tax rate, labour market reform and promotion of
corporate governance."
    Core orders, which exclude ships and power generation gear, rose 8.8 percent
in June from the prior month, well below a 15.3 percent gain forecast in a
Reuters poll of economists, and following a record 19.5 percent drop in May.
    Compared with a year earlier, core orders, a highly volatile data series
regarded as an indicator of capital spending in the coming six to nine months,
declined 3.0 percent in June, versus the median estimate for a 3.3 percent
annual increase.
        
    SEESAWING
    The Cabinet Office said in a statement that machinery orders are seesawing,
cutting its assessment for a second straight months. Previously it had said a
rising trend was seen stalling.
    "The forecasts for the third quarter do not look that strong," said Shuji
Tonouchi, senior fixed income analyst at Mitsubishi UFJ Morgan Stanley
Securities.
    "Companies were initially optimistic about capital expenditure for the
current fiscal year, but companies could be turning cautious in the short term
as consumer spending has been disappointing."
    Corporate investment is one of the key and so far missing ingredients of
Prime Minister Shinzo Abe's recipe for economic revival, dubbed "Abenomics",
aimed at pulling Japan out of nearly two decades of stagnation and deflation.
    The Bank of Japan's key tankan survey also argues for a moderate pick-up in
capital spending ahead, with big firms planning to raise investment by 7.4
percent in the fiscal year to next March.
    The economy shrank an annualised 6.8 percent in April-June, its biggest
slump since the March 2011 earthquake, with capital spending falling for the
first time in five quarters, stoking fears that any rebound may be too modest to
sustain firm growth. 
    Policymakers and private-sector economists expect that the economy will
rebound from the current quarter after taking a temporary hit from the rise in
sales tax rise to 8 percent from 5 percent.

 (Editing by Eric Meijer)
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