Japan's core private-sector machinery orders shrank in July as manufacturers prepared to cut capital spending, hunkering down for a slump in export markets and recession at home.
Although the decline of 3.9 percent from June was smaller than analysts had forecast in a Reuters poll, it did nothing to lift the gloom surrounding the world's second-largest economy, which suffered its sharpest contraction in seven years in the last quarter.
Analysts expect revised gross domestic product data on Friday to show an even bigger contraction than the preliminary data, their pessimism rooted in a government survey last week showing companies slashing plant and machinery spending.
Core machinery orders are a gauge of plans for capital spending, which along with exports have driven Japan's longest post-war economic expansion. Analysts had forecast a drop of 4.3 percent in July, but the volatile data, covering everything from equipment for automakers to telecommunications infrastructure, are difficult to predict. Financial markets barely reacted to the data.
Machinery orders from manufacturers fell 10.4 percent in July from June, the biggest decline in two years, as machine tool makers and petrochemical firms tightened their belts.
"Orders from both manufacturers and non-manufacturers were weak, especially those from manufacturers. That is probably because slowing exports are hurting capital spending plans at home," said Kyohei Morita, chief economist at Barclays Capital.
"Exports and capital spending, which have supported Japan's economy, are now sluggish." Japan's exports to the United States have been declining since a meltdown in the US mortgage market triggered a global credit crisis a year ago. The crisis has hit banks around the world and brought the eurozone to the brink of recession.
Japan's machinery orders from overseas fell 14.4 percent in July, declining for two months in a row. Foreign orders fell 3.9 percent in the second quarter and Barclays Capital's Morita said the tumble in July-September could be steeper. "That means Japan's exports will remain stagnant," he said.
The government said it expected core machinery orders, which exclude those for ships and equipment at power firms, to fall 3.0 percent in July-September after rising 0.6 percent in the previous quarter.
Companies cut capital spending by 6.5 percent in April-June from a year earlier, a survey by the Ministry of Finance showed last week. A change in accounting rules exaggerated the decline, but analysts said it showed budgets were clearly being tightened.
"Companies were hard hit in the second quarter, with high energy costs and weakening exports hurting revenues," said Azusa Kato, an economist at BNP Paribas. "The damage will linger in July-September, keeping capital spending on a weak note," she said.
The economy is expected to have shrunk 0.8 percent in the April-June quarter, compared with a 0.6 percent contraction in the government's initial reading, according to a Reuters poll. Revised gross domestic product data is due at 8:50 am on Friday (2350 GMT, Thursday).
Government officials say the economy is either heading into a recession or already in one, at least under the Japanese definition, which starts from the point at which growth begins slowing. Analysts expect the economy to barely escape recession in the more broadly used definition of two straight quarters of contraction. The numbers did not alter the market view that the Bank of Japan will keep interest rates on hold at 0.5 percent at least until next year.
Compared with a year earlier, core machinery orders in July decreased 4.7 percent, compared with a median forecast of a 5.1 percent decline in a Reuters poll.