Machinery orders from Japanese companies took an unexpected tumble in September, data showed on Friday, lifting bond prices and strengthening the view that the Bank of Japan will have to wait until early next year before raising interest rates.
Before the release of the data, BoJ Governor Toshihiko Fukui told parliament that he had no preset timing for rate hike in mind, while repeating his mantra that interest rates will be adjusted slowly. But he also gave the clearest signal yet that he was concerned that the practice of borrowing yen at low cost to invest in higher-yielding foreign assets - called yen carry trade - could distort the economy if it becomes rampant.
Core machinery orders, a volatile but leading gauge of capital spending, fell 7.4 percent in September from August on a seasonally adjusted basis - well below economists' forecasts for a 1.9 percent rise. "The data will not support an imminent rate hike scenario," said Noriaki Haseyama, economist at Dai-ichi Life Research Institute.
The Cabinet Office said it forecast that core machinery orders would rise 5.7 percent in the October-December quarter from the previous three months, when orders fell 11.1 percent, the sharpest quarterly decline since the data began in 1987.
Some economists said the weak orders data for September was due to a fall in mobile phone orders ahead of the introduction of mobile number portability in late October and was not a sign of a slowdown in capital spending.
Still, a string of mediocre economic data in the past few months has raised concerns that Japan's economy may be hitting the brakes. Financial markets have been scaling back expectations that the BoJ will soon follow up on its rate hike to 0.25 percent in July, although speculation of another rise in December has not completely died out.
A survey by a government-affiliated association showed on Friday that nearly one-third of economists expect a rate hike next month. Fukui told a parliamentary committee the central bank would decide on interest rates by monitoring both strong and weak economic data, including recent sluggishness in household spending.
"If economic conditions move in line with our forecast, it would meet our basic scenario of raising interest rates gradually," Fukui told a parliamentary committee.
Asked about carry trades, in which investors borrow cheaply in yen and use the funds to invest in higher-yielding currencies, Fukui said the BoJ was cautious about the risk of a sharp unwinding of the trades when the market's expectations of interest rates change. He said the yen's low interest rates are helping to swell the carry trade and his staff is still trying to determine how big the phenomenon has grown.
"If the size is very big and expectations for (global) interest rate movements change suddenly, there are substantial risks of a sharp unwinding that could cause various distortions, so we are watching this with vigilance," Fukui said. "We need to communicate with markets to make sure they don't find our monetary policy a surprise."
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