Japan's orders data shock casts shadow over recovery scenario

Japan's machinery orders tumbled by a record margin in May, dashing hopes for a bounce and casting doubt over a scenario of investment-led recovery in the world's third-largest economy. The data are highly volatile, but serve as an indicator of capital spending in six to nine months and May's shocking 19.5 percent slump raised questions about the economy's ability to tide over a dent in consumption caused by an April 1 sales tax hike.
Economists polled by Reuters had expected a modest 0.7 percent rise. One explanation for the nasty surprise was that companies rushed to take advantage of new tax incentives introduced in January before the end of last financial year in March, instead of spreading spending more evenly. That flattered January-March capital spending and led to a slump in April and May.
"This shows the huge spike in capital spending in January-March was just an aberration," said Yasutoshi Nagai, chief economist at Daiwa Securities. "Some people have said capital spending could lead economic growth but unless you have rising demand, you can't expect capital spending to grow." Officials at the Cabinet Office that released the data on Thursday said there were no special factors behind the May slump, noting they had not heard companies blaming the sales tax increase for a fall in orders.
Corporate investment is one of the essential and so far missing ingredients of Prime Minister Shinzo Abe's recipe for economic revival. Now in its second year and commonly referred to as "Abenomics" it promises to lift Japan from nearly two decades of stagnation and deflation with a combination of massive monetary stimulus, budget spending and growth-friendly reforms.
"Abenomics" scored early successes, boosting financial markets, business and consumer confidence and bringing windfall profits for exporters after successfully reversing years of debilitating excessive yen strength. Japan's economy grew an annualised 6.7 percent in the first quarter, its fastest since July-September 2011. Confident that the economy had enough momentum, the government went ahead with a long-debated sales tax increase to shore up its stretched finances assuming that a gradual pick-up in corporate investment would more than offset a temporary consumption dip. Recent data appeared to back that view with industrial output picking up, unemployment at record lows, and the Bank of Japan's quarterly "tankan" survey showing companies optimistic about their outlook and planning to ramp up capital spending.