* May core orders -19.5 pct m/m vs +0.7 pct forecast
* Sharpest drop on record bad omen for corporate investment
* Weak orders cast doubt over investment-led recovery
* June data seen key for outlook
* BOJ to keep policy intact, may cut growth forecast next
(Updates with additional comment, details)
By Tetsushi Kajimoto
TOKYO, July 10 Japan's machinery orders tumbled
by a record margin in May, dashing hopes for a bounce and
casting doubt over a scenario of investment-led recovery in the
world's third-largest economy.
The data are highly volatile, but serve as an indicator of
capital spending in six to nine months and May's shocking 19.5
percent slump raised questions about the economy's ability to
tide over a dent in consumption caused by an April 1 sales tax
Economists polled by Reuters had expected a modest 0.7
One explanation for the nasty surprise was that companies
rushed to take advantage of new tax incentives introduced in
January before the end of last financial year in March, instead
of spreading spending more evenly.
That flattered January-March capital spending and led to a
slump in April and May.
"This shows the huge spike in capital spending in
January-March was just an aberration," said Yasutoshi Nagai,
chief economist at Daiwa Securities.
"Some people have said capital spending could lead economic
growth but unless you have rising demand, you can't expect
capital spending to grow."
Officials at the Cabinet Office that released the data on
Thursday said there were no special factors behind the May
slump, noting they had not heard companies blaming the sales tax
increase for a fall in orders.
Corporate investment is one of the essential and so far
missing ingredients of Prime Minister Shinzo Abe's recipe for
Now in its second year and commonly referred to as
"Abenomics" it promises to lift Japan from nearly two decades of
stagnation and deflation with a combination of massive monetary
stimulus, budget spending and growth-friendly reforms.
"Abenomics" scored early successes, boosting financial
markets, business and consumer confidence and bringing windfall
profits for exporters after successfully reversing years of
debilitating excessive yen strength.
Japan's economy grew an annualised 6.7 percent in the first
quarter, its fastest since July-September 2011.
Confident that the economy had enough momentum, the
government went ahead with a long-debated sales tax increase to
shore up its stretched finances assuming that a gradual pick-up
in corporate investment would more than offset a temporary
Recent data appeared to back that view with industrial
output picking up, unemployment at record lows, and the Bank of
Japan's quarterly "tankan" survey showing companies optimistic
about their outlook and planning to ramp up capital spending.
The slump in May, led by the electric machinery, chemicals,
transportation and financial sectors, follows a 9.1 percent fall
in April and suggests a negative figure for April-June, which
would be the first quarterly decline in five quarters.
Compared with a year earlier, core machinery orders, which
exclude ships and electric power utilities, fell 14.3 percent in
May, against an expected 9.5 percent gain.
The numbers are likely to disappoint central bank officials,
who will review monetary policy next week and are expected to
keep intact its massive stimulus programme and consider cutting
its economic forecast for the current fiscal year.
But economists, noting the volatility of the data, are not
abandoning just yet their base scenario that the economy will
rebound after a temporary tax-related hit and expect the BOJ to
do the same.
Strong corporate earnings and the need for upgrades of
ageing equipment and facilities, particularly among
non-manufacturers, argue for recovery in investment, they say.
"I still expect capital spending to resume picking up in the
latter half of the current fiscal year to March, given ample
cash flow at companies," said Yasuo Yamamoto, senior economist
at Mizuho Research Institute.
Economists said, however, that June data, which will also
include companies' quarterly forecasts, would be crucial for the
outlook and assessment of "Abenomics" performance.
"If machinery orders continued to be weak in June, that
would be worrisome and it could force the Bank of Japan to alter
its scenario that capital spending would offset weakening
consumption," said Takeshi Minami, chief economist at
Norinchukin Research Institute.
In an encouraging signal for the outlook of domestic
demand, the Cabinet Office said on Thursday that consumer
confidence edged up in June, and raised its assessment on
consumer confidence, saying it is picking up.
But some economists noted that continued weakness in Japan's
exports might be a greater concern than any lingering effects of
the April 1 tax hike.
"It's the external sector that is showing signs of
deteriorating and that is something that needs to be addressed
in terms of the BOJ's outlook that we get next week," said
Robert Rennie, chief currency strategist at Westpac Bank.
(Additional reporting by Leika Kihara; Writing by Tomasz
Janowski; Editing by Eric Meijer)