July 9, 2007 / 3:42 AM / 13 years ago

UPDATE 3-Japan machine orders rise, capex seen solid

(Updates with economy watchers survey, paragraphs 21-22)

By Yoko Nishikawa

TOKYO, July 9 (Reuters) - Japan’s core private-sector machinery orders rose more than expected in May, pointing to solid corporate capital spending and bolstering the case for a Bank of Japan rate hike in August.

Core orders, which exclude those for ships and machinery at electric power firms, rose 5.9 percent from April, Cabinet Office data showed on Monday, beating a market consensus forecast for a 2.3 percent rise and following a 2.2 percent increase in April.

“The figures will be strong enough to change the view of those who had been looking at the capex outlook cautiously,” said Junko Nishioka, an economist at ABN AMRO Securities.

The data helped boost Japanese share prices and capped the price of Japanese government bond futures 2JGBV1. The yen also hit a session high against the dollar at 123.36 yen JPY= after the data although that buying did not last long.

“The good thing is the recovery seen in the electric machinery and auto sectors, which had been in a downtrend,” said Yoshimasa Maruyama, an economist at BNP Paribas.

The stronger-than-expected rise was helped by orders from the electric machinery sector, which rose for the first time in five months. Those from paper and pulp, and oil and coal products industries also supported the gain.

Inventory adjustments in information technology-related industries have softened the economic recovery a bit, and some economists have also been worried that auto exports to the United States could lose momentum.

The data also bore out the BOJ’s view that corporate capital spending will remain robust even though it will slow down a little bit from last year.

“Weak machinery orders were a cause of concern for the Bank of Japan, so the data must come as a relief,” said Maruyama.

The Cabinet Office upgraded its assessment of orders, saying they are seesawing, compared with its view last month that orders were somewhat weak.

Economists said orders in the April-June quarter look set to overshoot the Cabinet Office’s forecast of an 11.8 percent fall from the previous quarter.

BOJ MOVE

The solid growth in machinery orders reinforced the widespread view that the BOJ will raise its key interest rate target by a quarter percentage point to 0.75 percent, most likely in August and at the latest by September.

Investors generally expect no policy shift at the central bank’s two-day policy meeting starting this Wednesday.

They think the BOJ won’t want to move ahead of upper house elections on July 29, although the central bank has repeatedly said the political calendar does not affect its policy decisions. “The BOJ may want to see industrial output data due later this month before raising rates,” Mari Iwashita, senior strategist at Daiwa Securities SMBC, also said.

Industrial output has been soft so far this year, in part due to inventory adjustments in the IT sector, but the BOJ has said it is likely to grow later this year.

Separate data from the BOJ showed that Japanese banks’ outstanding loans rose 0.7 percent in June from a year earlier, increasing for the 17th straight month.

But the pace of growth was the slowest since March 2006, when lending grew 0.3 percent, partly due to a slower rise in home mortgage loans and a lack of strong demand for funds among big firms, which have abundant cash-flows.

Other data also showed Japan’s most widely watched measure of money supply — M2 plus certificates of deposit — grew 1.8 percent in June from a year earlier, compared with a consensus market forecast of a 1.5 percent expansion.

The broadest liquidity rose 3.6 percent in June, helped by a 32.1 percent rise in investment trusts that was the highest growth on record.

Separately, a survey of Japanese service sector workers, called “economy watchers” for their proximity to consumer and retail trends, showed their economic sentiment index dipped to the lowest level in more than two years.

The index fell to 46.0, the lowest since February 2005 when it hit 45.6, as an increase in local taxes and recent rise in oil prices hurt consumer sentiment.

* Click [nT37566] for INSTANT VIEW on the data.

(Additional reporting by Leika Kihara)

((Editing by Malcolm Whittaker; Reuters Messaging: yoko.nishikawa.reuters.com@reuters.net; +81-3-3432-9082; yoko.nishikawa@reuters.com)) Keywords: JAPAN ECONOMY/

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