October 9, 2014, 12:30 JST

A new hope for a investment-led growth?

A new hope is emerging that the private capital expenditure may start to contribute to Japan's growth. 

Core machinery orders, a leading indicator for the private capital expenditure in Japan, expanded by 4.7% month on month in August, marking the third consecutive monthly expansion (see chart below). While the level of core machinery order is still more than 10% lower than the recent peak in March, the upward momentum seen in the last 3 months is welcome. 

 Source: Cabinet Office, JMA.

The outlook for the private capital expenditure has been ambiguous. Various surveys including BoJ Tankan have pointed to the willingness on the part of Japanese corporates to expand its investment. However, these bullish plans were nowhere to be seen in the actual statistics.

According to the BoJ September Tankan survey, Japanese companies are planning to increase their investment by 4.2% YoY in the fiscal year 2014 (April 2014-March 2015). However, the machinery order has hardly shown any sign of a matching expansion. Even after the expansion in August, the year on year growth is still negative (-3.3% YoY, see chart below). 

 Source: Cabinet Office, JMA.

The private capital expenditure is hoped to be one of principal engines for the recovery while private consumers struggle under the weight of the consumption tax hike. If the positive momentum in the last three months can be extended for a few more months, we can start to be more optimistic on the sustainability of growth in Japan.