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Japan Sept core machinery orders tumble in dent to capex outlook

[TOKYO] Japan's core machinery orders tumbled at their fastest pace in more than two years in September, a decline that companies expect to persist into October-December in a sign that business investment is losing momentum.

The 8.1 per cent fall in machinery orders was more than the median estimate for a 1.8 per cent decline and follows a 3.4 per cent increase in the previous month.

Economists say the weakness is likely temporary because rising corporate earnings and domestic labour shortages should push up capital expenditure next year, but there are some doubts about the pace of gains.

"Capital expenditure tends to track corporate earnings, so investment will remain in a growth phase," said Hiroaki Muto, economist at Tokai Tokyo Research Center.

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"Next year domestic and overseas economies may not run as hot as they did this year, so the pace of gains in capital expenditure could be more moderate." Prime Minister Shinzo Abe has made increasing capital expenditure a priority in his economic agenda to raise productivity and help Japan cope with a declining population.

The Bank of Japan also regularly points to capital expenditure gains as a reason to be optimistic that the economy will create more jobs and continue to grow.

However, machinery orders tend to be very volatile, so the decline in September is not likely prompt economists to change their outlook.

Orders from manufacturers fell 5.1 per cent month-on-month in September, driven by lower orders for cranes and other heavy machinery used in construction.

Service-sector orders fell 11.1 per cent, led by falling orders for trains, and computers and servers used in finance and insurance, Cabinet Office data showed on Thursday.

Companies surveyed by the Cabinet Office expect core orders to fall 3.5 per cent in October-December after a 4.7 per cent rise in the previous quarter.

"The fourth-quarter forecasts don't look that healthy, so a little caution is advised," said Kentaro Arita, economist at Mizuho Research Institute.

"However, I'm not pessimistic because the reasons for capex to rise remain in place." Compared with a year earlier, the core orders, which exclude those for ships and utilities' electrical power equipment, fell 3.5 per cent in September, versus the median estimate for a 1.9 per cent increase.

Japan's economic growth is expected to slow somewhat in July-September due to slightly weaker consumer spending, but economists are optimistic that any loss of momentum will be brief.