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Japan's soft machinery orders heighten doubts over business spending

[TOKYO] Japan's core machinery orders slipped for the second consecutive month in August, suggesting deeper fissures in business investment and the broader economy from slowing global trade.

A slowdown in China and the US-China trade war have emerged as risks for Japan's recovery prospects, but policymakers have put their faith in spending by consumers and businesses at home to offset the risks to the outlook.

Japan's core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, fell 2.4 per cent in August from the previous month, Cabinet Office data showed on Thursday.

The drop was largely in line with a 2.5 per cent decline predicted by economists in a Reuters poll and followed a sharp 6.6 per cent fall in July, the largest month-on-month loss since a 7.8 per cent drop in May.

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From a year earlier, core orders, which exclude those of ships and electricity, lost 14.5 per cent in August, the biggest year-on-year drop since November 2014, Refinitiv data showed.

"(The reading) suggests capital spending is weakening," said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

"It's likely it has peaked out from a cyclical perspective, as pressure from the US-China trade war continues and focus is also on the impact of the sales tax hike."

Capital expenditure has been among the few areas of strength in the economy as non-manufacturers continue to invest heavily on automation to cope with a tight labour market, offsetting the weakness in manufacturers' spending.

Declines in capex could add to speculation the government will boost spending.

The Bank of Japan has faced heightened expectations it could ease policy at its Oct 30-31 board meeting to dampen the impact from weakening external demand.

Japan's economy has recently benefited from strong domestic demand, although there are concerns the country's higher consumption tax this month could hurt the outlook. A Reuters Tankan poll earlier on Thursday showed Japanese manufacturers' business outlook was less pessimistic in October while service-sector sentiment rose to a three-month high.

Some consolation this week also came from household spending data, which rose for a ninth straight month in August, the longest such streak since comparable data became available in 2001, data on Tuesday showed.

A bright spot in Thursday's data was a 21.3 per cent month-on-month jump in orders from overseas, the biggest rise since October 2015, though it was mainly driven by big-ticket items, including for railway cars and planes.

Still, the outlook for Japan's economy, the world's third-largest, remains murky as manufacturers face challenges from prolonged contractions in exports and production.

While the economy grew an annualised 1.3 per cent in the second quarter, some analysts have warned it could be left without growth drivers if domestic demand falters.

The Cabinet Office on Thursday maintained its assessment on machinery orders to say they are showing a pick up.

"There was a big rise in June and that was followed by a fall in July and August," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

By sector, core orders from manufacturers fell 1.0 per cent in August from the previous month, declining again after rising in July, while those from the service-sector fell 8.0 per cent, the Cabinet Office data showed.

REUTERS