Japan Machinery Data Show Companies Still Cautious on Outlook

A sharp drop in Japan’s December machinery orders suggests companies remain cautious about domestic growth prospects.

Core machinery orders fell 15.7% on-month in December — the biggest fall since the data series began in April 2005 and far worse than the 4.1% decline expected. Core orders exclude often volatile orders for electric power companies and ships.

Machinery orders are widely regarded as a leading indicator of corporate capital investment, since they typically increase if businesses are expanding operations.

That makes December’s figure a worrisome sign for Prime Minister Shinzo Abe’s economic program, known as Abenomics. Policy makers were hoping corporate capital expenditure would help the economy grow if consumption falls as expected after a planned sales tax hike in April.

The government said December’s sharp fall came after a sharp rise in November — when the data were buoyed by some unusually big orders — and that orders still increased in the October-December quarter from the previous one. The volume of orders in the quarter — Y2.4 trillion ($24 billion) — was also the biggest since the third quarter of 2008.

The government forecast core machinery orders to fall 2.9% in the January-March quarter from October-December, when they rose 1.5%.

Economists say companies are merely replacing old machines rather than expanding. Concerns about the impact of the sales tax increase and the government’s commitment to economic reform are making companies hesitant to spend more on domestic growth, economists say.

“Companies are still maintaining a cautious stance,” said Long Hanhua Wang, an economist at RBS Securities Japan.

Still, Mr. Wang said the broader trend of companies boosting capital spending as earnings recover remains intact. RBS expects Japan’s economy to have grown at a real annualized pace of 2.8% in October-December from the previous quarter, helped by a 1.2% expansion in private capital spending.

Others said the declining and aging of Japan’s population suggests limits growth prospects no matter how hard the government tries to stimulate the economy, unless the administration can succeed in raising growth potential.

“Many companies, when they increase fresh capex, are doing so overseas,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

via:http://blogs.wsj.com/economics/2014/02/12/japan-machinery-data-show-companies-still-cautious-on-outlook/?mod=WSJBlog&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Feconomics%2Ffeed+%28WSJ.com%3A+Real+Time+Economics+Blog%29