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Japan machinery orders tumble, fuel doubts on capital expenditure

Machinery orders from overseas fell 12% in June, the biggest decline in more than two years.


JAPAN'S core machinery orders tumbled in June at the fastest pace in six months, with firms expecting another modest drop in the third quarter in a sign that capital expenditure may have peaked out as global trade friction clouds the horizon.

The 8.8 per cent fall in core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending, was more than the median estimate for a 1.3 per cent decline in a Reuters poll and marked the biggest drop since December 2017.

Manufacturers surveyed by the Cabinet Office have forecast core orders will edge down 0.3 per cent in July-September after a 2.2 per cent increase in April-June.

The machinery orders, which come a day before data expected to show the economy resumed expansion in the second quarter due to robust consumer spending and capital expenditure, may heighten policymaker concerns about future growth.

"Machinery orders are moving in line with a temporary slowdown in global manufacturing activity," said Hiroaki Muto, an economist at Tokai Tokyo Research Center.

"Japan's economy will continue to grow but at a slightly slower pace. Trade friction is a risk, but there is no substantial impact so far." Capex may have peaked out in the second quarter and will grow at a slower pace in the future, Mr Muto added.

By sector, orders from manufacturers slumped by 15.9 per cent in June, after a 1.3 per cent increase in May, hit by lower orders from makers of electronics, chemicals and heavy equipment, the data showed.

Orders fell partly because some manufacturers curbed output after a magnitude 6.1 earthquake struck Osaka, Japan's second-biggest metropolis, in mid-June, according to Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

Manufacturer orders could weaken further if Japan becomes ensnared in US President Donald Trump's protectionist trade polices aimed at reducing the US trade deficit.

"We don't know if the US will raise auto tariffs on Japan, but the mere threat of trade friction means Japanese companies could preemptively move more production overseas," Mr Miyazaki said.

"This would make companies less inclined to invest in Japan." Service-sector orders decreased 7 per cent in June, versus a 0.2 per cent increase the previous month, due to lower orders from the retail, wholesale and construction industries.

The Cabinet Office lowered its assessment of machinery orders, saying a recovery in orders has paused.

In another sign of concern, machinery orders from overseas fell 12 per cent in June, the biggest decline in more than two years. Mr Miyazaki said that was due to slowing economic momentum in Europe and China. REUTERS

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