Japan's Machinery Orders Post Surprise Gains In July

Japan's core machinery orders extended gains in July, raising hopes business growth spending may offset near-term headwinds from a global economic slowdown and a weaker yen, which has pushed up costs at home.

The surprise increase in core orders - a barometer of capital expenditure - could provide temporary relief for policymakers hoping for corporate investment to spur a domestic-led recovery in the world's third-largest economy.

The Reuters Tankan survey, however, separately showed that the business confidence of Japanese manufacturers retreated from a seven-month high in September, as the corporate sector faced persistent pressure from high raw material costs.

Core orders, a highly volatile data series regarded as a guide to capital spending in the coming six to nine months, grew 5.3% in July from the previous month, Cabinet Office data showed.

The advance, which was boosted by a number of medium-sized orders for railway cars, was stronger than a 0.8% contraction forecast by economists in a Reuters poll and followed a 0.9% increase in the previous month.

The result "points to strong non-residential investment growth this quarter, chiming with solid capital shipments growth in July and record corporate profit margins in the second quarter," said Darren Tay, Japan economist at Capital Economics.

By sector, orders from manufacturers dropped 5.4% month-on-month, weighed down by declining orders in the electrical machinery and the automobile and parts sub-sectors.

Those from non-manufacturers jumped 15.1%, driven by a 172.7% surge in orders from the transportation and postal sub-sector that outweighed a fall in the wholesale and retail sub-sector and pushed up overall orders.

WEAK YEN

While Japan Inc faces higher import costs due to a decline in the yen, which has lost about 20% against the dollar this year, the weaker currency may also make producing goods at home more attractive for export-focused manufacturers.

However, the yen's slide this year was unlikely to lead to bigger spending on factories and other manufacturing facilities immediately, said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

"It takes about two years for exchange rate fluctuations to start affecting firms' capital expenditure plans," Tsunoda said.

"Companies are at the stage of assessing whether the yen's depreciation will be sustained. It won't lead to an immediate increase in domestic capital investment."

Compared with a year earlier, core orders, which exclude volatile numbers from shipping and electric utilities, rose 12.8% in July, the data found.

In the Reuters Tankan survey, the manufacturers' sentiment index fell to 10 in September from 13 last month as the yen's recent plunge to a 24-year low amplified the pain of higher import costs for domestic businesses.

Japan's economy grew more than initially reported in April-June on higher business and consumer spending following the lifting of local COVID-19 restrictions.

But it faces growing risks from an economic slowdown in the United States, Europe and major trading partner China, while broad price rises and a weak yen are hitting consumer spending and weighing on business sentiment at home.