Japan's booming July machinery orders point to accelerating capex, growth

[TOKYO] Japan's core machinery orders robustly exceeded expectations in July, rebounding from the previous month's decline and firming up the view that capital expenditure will continue to expand and boost overall economic growth.

The 11.0 per cent rise in core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending, soared over the median estimate for a 5.7 per cent increase seen in a Reuters poll and was the fastest increase since January 2016.

"Japanese companies' need to invest in new equipment is so strong that they are willing to do so even though trade protectionism clouds the outlook," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities. "This is clearly driven by labour shortages. There is room for capex to rise further and add to economic growth."

Manufacturers' orders rose 11.8 per cent in July, rebounding from a 15.9 per cent decline in the previous month due to increased orders from makers of chemicals, heavy machinery and processed food. Service-sector orders rose 10.9 per cent in July, versus a 7.0 per cent decline in the previous month, thanks to bigger orders from wholesalers, retailers, shipping companies, and telecommunications businesses.

Machinery orders from overseas rose 6.0 per cent month-on-month in July, recovering from a 12.0 per cent decline in the previous month, a sign that export demand is holding up in the face of growing trade friction.

An increase in capital spending in the second quarter drove Japan's economy to its fastest growth since 2016, and Thursday's machinery orders data suggest this spending will increase as companies invest in equipment to cope with a shrinking workforce.

Japan's workforce is shrinking due to its rapidly ageing population, and companies across a broad range of industries are investing more in automation and IT systems to operate with fewer staff. Separate data this month showed a modest increase in household spending amid rising real wages, offering hope that consumer spending will also support growth.

Increased spending by both households and corporations would boost Japan's gross domestic product, but there are risks to the outlook, notably the US-China tariff feud spilling over into global trade on which Japan's export-dependent economy relies.

Business is also concerned that US President Donald Trump will turn his attention to Japan, asking for specific measures from Japan to lower its trade surplus with United States - backed up by the threat of high tariffs.

REUTERS