August 9, 2012 / 12:30 AM / 8 years ago

UPDATE 1-Japan machinery orders rise, but euro zone clouds outlook

* June core machinery orders +5.6 pct vs forecast +10.9 pct
    * Q2 core orders -4.1 pct qtr/qtr, Q3 orders seen -1.2 pct
    * Slackening global demand clouds outlook
    * BOJ seen on hold, ready to act if growth threatened

    By Kaori Kaneko
    TOKYO, Aug 9 (Reuters) - Japan's core machinery orders rose in June for the first time in
three months, rebounding from a record drop i n May, b ut c ompanies expect orders to s lide i n the
third quarter as un certainty over gl obal ec onomy ke eps companies from boosting capital spending.
    The data cast some doubt about the Bank of Japan's forecast of a moderate econom ic recover y 
though th e central bank is expected to keep monetary policy unchanged at its two-day rate review
that ends later on Thursday.
    Core machinery orders, used to gauge the strength of capital spending -- a key driver of the
world's third biggest economy, rose 5.6 percent, compared with a median forecast for a 10.9
percent rise. It followed a 14.8 percent fall in May, the biggest decline since comparable data
became available in April 2005.
    Companies surveyed by the Cabinet Office have forecast that core orders, which exclude those
for ships and machinery at power utilities, will fall 1.2 percent in July-September from the
previous quarter. The orders fell 4.1 percent in April-June, the first decline in three
quarters.
    Analysts expect capital spending to rise up in the coming months on the back of
reconstruction spending worth 3.6 percent of Japan's gross domestic product, but uncertainty
over Europe's debt crisis and the performance of the Chinese and U.S. economies could make
companies hesitant to invest in plants and equipment.
    "I expect capital spending to firm up in the coming months as China and other emerging
market economies bottom out in the summer. But Europe's debt problems pose the biggest risk to
this scenario," said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Morgan Stanley
Securities.
    "As such, the Bank of Japan will stand pat on policy today. But further easing cannot be
ruled out in the coming months, particularly if market turmoil stemming from Europe's crisis
causes a sudden spike in the yen and a plunge in share prices."
    
    The Cabinet Office, which compiles the data series, cut its assessment of machinery orders
and said that they were moving sideways, compared with its previous view that they were growing
moderately as a trend.
    The Bank of Japan may escalate its warnings over slowing global demand and renewed gains in
the yen, signalling its readiness to ease again if the economy's recovery comes under threat.
 
    Japan's economy is expected to outperform most other developed nations this year with a
boost from solid domestic demand, but analysts have slashed forecasts for factory output as the
global slowdown becomes more pronounced, according to a Reuters poll last month.
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