Japan's August core machinery orders point to more capex gains

[TOKYO] Japan's core machinery orders unexpectedly rose in August after robust gains in the previous month in a sign that capital spending is set to grow as companies invest in new equipment and software to manage labour shortages.

The 6.8 per cent increase in core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending, compared with the median estimate for a 4.0 per cent decline in a Reuters poll. In July core orders rose 11.0 per cent, the fastest increase since January 2016.

Japanese companies' capital expenditure plans remain strong for the current fiscal year, a Bank of Japan tankan survey showed last week, as companies increase investment in automation and labour-saving technologies.

The trade war between the United States and China poses a risk to the outlook because it could indirectly reduce sales from China, making some Japanese manufacturers less likely to buy new equipment.

"Japanese companies are following through on their bullish capital expenditure plans," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities. "There were concerns that companies would reign in capital expenditure due to worries about trade friction, but this isn't happening. Capex will continue to rise as long as trade friction doesn't become more intense than it is now."

Orders from manufacturers rose 6.6 per cent in August, following an 11.8 per cent increase in the previous month, due to increased orders from auto manufacturers and the steel sector.

Service-sector orders rose 6.0 per cent in August, versus a 10.9 per cent increase in the previous month as orders from companies in freight shipping. Orders from financial services companies also rose as they install automatic reception systems because of labour shortages.

The Cabinet Office upgraded its assessment of machinery orders, saying they are in recovery. Big companies plan to increase capital expenditure by 13.4 per cent in the current fiscal year ending in March 2019, the BOJ's tankan survey for September showed last week, a shade lower than the previous tankan's 13.6 per cent increase. But the International Monetary Fund cut its forecasts on Tuesday for global economic growth, partially due to the Sino-U.S. trade war.

Japanese manufacturers are sensitive to developments in global trade because they export large numbers of machines and parts to China where they are used to make finished goods for the United States and other markets.

Machinery orders from overseas rose 7.8 per cent in August, faster than a 6.0 per cent increase in the previous month, which may temporarily ease concerns about export demand.

REUTERS