Japan machinery orders fall, uncertain outlook keeps BOJ on edge

April 13
8:50 AM 2015

Japan's core machinery orders fell for a second straight month in February in a sign that business investment remains soft, and analysts say the smaller-than-expected decline won't necessarily allow policymakers to relax given an uncertain economic outlook.

The 0.4 percent monthly fall in core machinery orders, a highly volatile data series, came as a recent run of weak indicators raised doubts about a sustainable economic rebound following a recession last year.

However, the figure released by the Cabinet Office on Monday was better than economists' median estimate of a 2.8 percent decline and followed a 1.7 percent drop in January.

Analysts say the decline in core orders, regarded as an indicator of capital spending in the coming six to nine months, was a reaction to a 8.3 percent gain in December, and expect them to mark a third straight quarterly gain in January-March.

"The figure was not bad at all as it points to growth in core orders in the first quarter," said Koya Miyamae, senior economist at SMBC Nikko Securities.

"But given weakening exports and private consumption, the pace of pickup will likely slow from April."

A soft demand outlook will be a worry for the Bank of Japan, which last week kept its massive stimulus programme intact and shrugged off speculation of near-term fresh stimulus, even as inflation ground to a halt and growth stalled two years into its radical experiment to revive the economy.

Some expect the chance of BOJ action on April 30, when it issues new long-term forecasts that may lead to a cut in its rosy price projections.

Still, many economists see the BOJ further expanding stimulus in the second half, likely in October, giving itself more time to review the inflation outlook.

Policymakers are counting on higher capital spending driving a virtuous cycle of sustainable economic growth via increases in jobs and wages, and strong private consumption.

But weak capital spending plans for the new fiscal year that began on April 1, seen in the BOJ's key tankan survey, suggests that business investments may remain slow to recover from a slump after the sales tax hike last year.

Despite Prime Minister Shinzo Abe's call to splurge, Japanese firms - from Toyota Motor (7203.T) to Daikin Industries' (6367.T) - remain cautious about boosting new spending on factories and equipment.

The Cabinet Office stuck to its view that machinery orders are on a gradual pickup trend.

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