Japan's core machinery orders rose 10 times faster than forecast in May as companies led by steel and semiconductor makers planned more spending on equipment instead of cutting back to cope with rising raw material costs.
The 10.4 percent rise in core private-sector machine orders, an indicator of capital spending in six to nine months, may help firms make up for slowing personal consumption, but not enough to avoid a second quarter of economic contraction, analysts said. While government bonds fell briefly, the data did little to change the market's view that the Bank of Japan will keep interest rates unchanged this year as it focuses on the risk of slowing growth rather than accelerating inflation.
Companies tend to boost spending in April-June, the first quarter of Japan's fiscal year, to renew old equipment but tighten their belts later in the year if business conditions do not meet their expectations.
"The May figure may appear strong on the surface due to big one-time orders," said Takeshi Minami, chief economist at Norinchukin Research Institute. "But what's more important is how much orders could fall in July-September." Economists polled by Reuters had expected core private-sector machinery orders to rise 1.1 percent from April, when they gained 5.5 percent.
Manufacturers surveyed by the government forecast that core private-sector orders will show a drop of 10.3 percent for April-June. Quarterly orders growth is now likely to be better than that, analysts said. "Still, I'm not so optimistic about the outlook as corporate profits were falling," said Mamoru Yamazaki, chief economist at RBS Securities. "As higher raw materials costs further squeeze profit margins, companies will find it more difficult to act positively."
Japanese companies are struggling to pass on the surging cost of energy, metals and other raw materials to their customers. Facing rising prices and a slowing global economy, companies are expecting slimmer profits. Japanese business morale sank to a five-year low and big firms responded to a dim profit outlook with the tightest capital spending budgets since 2002, the Bank of Japan's tankan business sentiment survey for June showed last week.
Economists said June orders could fall sharply from May, when growth was driven largely by big orders from steelmakers, semiconductor manufacturers and railway operators. "If companies cannot keep up with the pace of rising costs and start slashing their spending plans, that could be a sign of a serious recession in Japan," said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute.
A Reuters poll showed that Japan's economy is expected to have shrunk 0.1 percent in April-June from the previous quarter after robust first-quarter growth of 1.0 percent. Economists, including Minami of Norinchukin Research Institute, expect capital spending to add slightly to second-quarter economic growth but not enough to offset a drop in personal consumption, which makes up 55 percent of gross domestic product.
A government index measuring the overall trend of personal consumption, compiled each month using spending data, fell 0.4 percent in May from April, reinforcing expectations that rising food and fuel prices were making consumers reluctant to spend.
The benchmark 10-year government bond yield rose 1 basis point to 1.625 percent, having hit 1.650 percent after the machinery orders release, although markets were focused more on overnight Wall Street gains and the outlook for the US economy. The Bank of Japan has kept monetary policy on hold since raising rates in February last year. It abandoned its tightening bias in April this year citing an uncertain economic outlook at home and abroad.
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