Core machinery orders, a leading indicator of domestic capital expenditure activity in Japan, expanded by 7.6% month on month in October. While the expansion is welcome, its strength was insufficient to make up for the much larger decline of -18.3% month on month it suffered in September. Judging by the machinery orders, there seems to be no meaningful upturn in the private capital expenditure trend in Japan.

Machinery orders statistics is becoming a poor indicator of private capital investment though, as R&D and software investment increasingly accounts for larger portion of capital investment. In the fiscal year 2017, R&D and software investment accounted for 32% of the whole capital investment with the software being the fastest growing segment of private capital investments.

With regards to the private capital investment outlook, the next important data points to look out for would be the December BoJ Tankan survey that includes the updated outlook for private capital investments.

Brief overview of “Machinery orders”:

Machinery orders track orders received by 280 machinery makers in Japan. The results are published monthly, with a quarterly survey for orders outlook published together with March, June, September and December results. Orders are categorized by the source of orders, namely the public sector, private domestic sectors, overseas as well as agencies that supply machinery to SMEs.

Orders from private domestic sectors are considered to be an important leading indicator for domestic capital investment. As orders from power generators and shipping industries tend to be extremely volatile, private domestic orders excluding these two industries are considered as core machinery orders. It is important to note that even the core machinery orders are still highly volatile, oscillating from month to month. In the recent years, the core machinery orders tend to lead private capital expenditures by 2-3 months.