An unexpected plunge in orders of new machinery by Japanese companies has raised concerns about businesses’ appetite for investment – a crucial but so far unreliable part of Prime Minister Shinzo Abe’s pro-growth economic agenda.
Core machinery orders, considered a leading indicator of overall capital spending, fell by 19.5 per cent in May compared with April, the government said on Thursday.
It was the sharpest fall since at least 2005, the earliest period for which comparable data are available, outstripping even the sizeable declines recorded during the depths of the global financial crisis five years ago.
It was also the second-largest fall in a row, following a 9.1 per cent drop in April. The previous decline had been widely expected by economists, who saw it as an inevitable response to an increase in Japan’s national sales tax that took effect on April 1.
The tax increase had prompted a rush of pre-increase spending across all sectors of the economy, from consumers to businesses, much of it “borrowed” from the future – meaning a temporary fall was all but certain to follow.
But experts had expected machinery orders to rebound in May, with consensus forecasts compiled by news services showing economists predicting a 0.7 per cent rise in orders on average.
Mr Abe is leading an effort to stimulate Japan’s economy through government spending, looser monetary policy and productivity-boosting structural changes.
One of the central goals of “Abenomics” is to coax businesses to spend more on everything from payrolls to production equipment – something that many have been reluctant to do during the country’s 15 years of deflation.
After a slow start in 2013, capital investment jumped by 7.6 per cent in the first quarter of this year, becoming an important driver of overall growth. An important question is how much of that increase represented a fundamental and lasting shift toward optimism among business leaders, rather than a one-off bump.
Monthly machinery orders are known to be volatile, even though the core number excludes big orders from the electricity and shipping sectors that have a disproportionate impact on the data. Still, experts said the size of May’s decline was a cause for concern.
Daiju Aoki, an economist at UBS, said that even if machinery orders rebounded in June, they would likely fall short of the government’s official estimate of a 0.4 per cent expansion in the April-to-June quarter.
Hiromichi Shirakawa of Credit Suisse said the “disappointing” data “appeared to pose a downside risk” to his bank’s view that overall capital spending grew in the quarter.