Japan's February machinery orders beat expectations, wholesale prices slow

TOKYO (Reuters) - Japan’s core machinery orders rose unexpectedly in February for a second consecutive month thanks to increased orders from manufacturers, a positive sign of corporate investment supporting economic growth.

FILE PHOTO: People work next to heavy machineries at a construction site in Tokyo, Japan, March 13, 2016. REUTERS/Yuya Shino

Separate data out on Wednesday showed wholesale prices rose at a slower pace in February, painting a picture of an economy that is healthy enough to continue growing but not robust enough to generate the inflation the Bank of Japan needs to overcome the country’s deflationary mindset.

The 2.1 percent increase in core orders, a highly volatile data series regarded as a good indicator of capital spending in the next six to nine months, handily beat the gloomy median estimate for a 2.5 percent decline forecast in a Reuters poll of economists.

The Bank of Japan’s tankan sentiment survey last week showed that mid-sized manufacturers planned to boost capital expenditure in the new fiscal year started on April 1, also suggesting business investment is likely to remain healthy.

However, worries about U.S. trade protectionism and potential gains in the yen versus the dollar pose risks to the outlook for Japan’s capital expenditure.

“There’s no change to my assessment that capital expenditure remains in an expansion phase, driven by the manufacturing sector,” said Yusuke Ishikawa, senior economist at Mizuho Research Institute.

“Uncertainty about U.S. trade policy could potentially cause Japanese companies to stop investing, but so far this is not happening. Capex will continue to contribute to Japan’s growth.”

Orders from manufacturers rose 8.0 percent in February, following a 9.9 percent increase in the previous month, due to an increase in orders from makers of steel and chemicals.

Non-manufacturers’ orders were unchanged in February as gains in orders from the telecommunications sector offset a decline in orders from the real estate, shipping, and finance industries. In January non-manufacturers’ orders rose 4.4 percent.

Core orders, which exclude those for ships and from electric power utilities, rose 2.4 percent from a year ago versus the median estimate for orders to remain unchanged.

The outlook is heavily clouded by the brewing trade war between the United States and China.The two economic superpowers have threatened each other with heavy tariffs amid growing U.S. disapproval of China’s trade practices and its treatment of foreign intellectual property.

Japanese exporters would be unlikely to increase investment if China and the United States were to carry out their threats, with serious likely consequences for global trade and growth.

Wholesale prices in Japan rose 2.1 percent in the year to March, which was more than the median forecast for a 2.0 percent annual increase but still a slowdown from a revised 2.6 percent annual increase in February.

Reporting by Stanley White; Editing by Eric Meijer