Surprise drop in Japan machinery orders stokes recovery fears

FILE PHOTO: Smoke rises from a factory during the sunset at Keihin industrial zone in Kawasaki, Japan, January 16, 2017. REUTERS/Toru Hanai

By Tetsushi Kajimoto

TOKYO (Reuters) -Japan’s core machinery orders unexpectedly fell the most in about a year in February, government data showed, dashing hopes for a pick-up in capital expenditure needed for a private sector-led recovery from the coronavirus-induced slump.

Policymakers are counting on companies to spend their huge cash piles on investment in plant and equipment and wage hikes to help pull the world’s third-largest economy out of deflation and stagnation.

Many companies however are reluctant to invest amid worries over a fourth wave of COVID-19 infections, although a gradual recovery is expected later this year as vaccinations become more accessible.

The Cabinet Office data on Wednesday showed core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, fell 8.5% in February from the previous month.

It was a second straight month of contraction and marked the fastest decline since April 2020. A Reuters poll of economists had predicted 2.8% growth, following a 4.5% drop in January.

“The sharp fall in machinery orders in February poses downside risks to our view that business investment continued to rise last quarter,” said Tom Learmouth, Japan economist at Capital Economics.

“However, the recovery in private investment should still gather pace again in the second half of the year as vaccines allow the economy to regain full health.”

By sector, manufacturers’ orders declined 5.5% in February from the prior month, dragged down by computers, nuclear power motors and engines.

Orders from non-manufacturers also decreased 10.9%, led by electric meters, railway cars and farm equipment.

Many economist have forecast a contraction in economic growth in the first quarter as COVID restrictions hampered service-sector activity, such as hotels and restaurants, keeping companies from boosting investment.

The Cabinet Office cut its assessment on machinery orders to say a pick-up is stalling. Previously, orders were described as picking up.

Underscoring solid overseas demand, external orders, which are not counted as core machinery orders, jumped 76.2% month-on-month in February, helped by a big ticket item that gave a one-off boost, a Cabinet Office official said.

The value of external orders hit a record 1.8 trillion yen ($16.53 billion) under comparable data available since April 2005, he added.

Compared with a year earlier, core orders, which exclude those for ships and electric utilities, declined 7.1% in February, versus a 2.3% gain predicted by economists.

($1 = 108.9100 yen)

(Editing by Jacqueline Wong)