Japan's machinery orders fall, clouding outlook for capital spending recovery

TOKYO (Reuters) - Japan’s core machinery orders fell for the first time in three months in September and at faster than expected pace, denting hopes that a quick pickup in business spending could help the economy stage a brisk recovery from its COVID-19 crisis.

FILE PHOTO: Businessmen walk past heavy machinery at a construction site in Tokyo's business district, Japan, January 16, 2017. REUTERS/Toru Hanai

The decrease in core orders underscored corporate Japan’s reluctance to commit to more capital investment as a resurgence in coronavirus infections darkened the outlook for global demand.

Core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, lost 4.4% in September after a 0.2% rise in the previous month.

The drop, which marked the first decline since June, was much larger than a 0.7% contraction seen by economists in a Reuters poll.

“Production and exports are recovering at a fast pace, so corporate earnings are also likely to improve quite quickly,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute.

“But with output dropping so much in the second quarter, firms remain cautious about capital spending.”

Manufacturers expected core orders to fall 1.9% in October-December, after a 0.1% drop in the previous quarter that marked the fifth straight quarter of declines, the Cabinet Office data showed on Thursday.

Core orders were dragged down by lower spending on electrical measuring instruments and information services, such as communication networks, a government official said.

Japan’s economy is gradually recovering from the shock of the coronavirus pandemic largely thanks to stronger overseas demand in recent months, which fuelled a pickup in output.

Prime Minister Yoshihide Suga instructed his cabinet on Tuesday to put together a package of stimulus measures focused on spurring structural change and boosting productivity and digitalisation.

But the prospect of deeper cuts in capital expenditure - or, at best, a slow recovery in capital spending - are clouding the outlook, analysts say.

By sector, orders from manufacturers rose 2.0%, boosted by food and beverages, while those from non-manufacturers advanced 3.2%. Both sectors’ gains were due to a seasonal adjustment in the data, the government official said, even as overall core orders declined.

From a year earlier, core machinery orders, which exclude those for ships and electricity, slumped 11.5% in September, almost exactly matching an 11.6% decline expected by economists.

Reporting by Daniel Leussink; Editing by Sam Holmes