May 19,2014,11.30 JST

Japan Inc. shows stronger appetite to invest in Japan

There is a sign that Japan Inc. is accelerating their capital investment within Japan. Core machinery orders, a leading indicator for the private capital expenditure in Japan, grew by 19% month on month (MoM) in March. On quarterly term, core machinery orders grew by 4.2% quarter on quarter (QoQ) in January-March 2014, accelerating from 1.9% QoQ in October-December 2013. The acceleration gives a hope that a growing demand from private capital expenditure could offset the loss of demand from private consumption due to VAT hike in 2014.   

IN 2013, the growth in private capital expenditure has been disappointing. Despite the recovery in corporate profits, private capital expenditure in fact fell by 1.5% year on year in 2013. Various surveys for capital expenditure plan in 2014 have not been promising either. According to the BoJ Tankan survey for example, Japanese companies are planning to cut its investment by 0.7% in FY2014.

In this light, the positive news from machinery orders data is encouraging as it suggests a possibility that the private capital expenditure could become a driver for growth in 2014. Whether it does so can be a make or break issue for Abenomics. The growth in Japan so far has been led by private consumption. As the sales tax hike in April depresses consumers’ purchasing power, it is critical that either private capital expenditure or exports fill the gap left behind by private consumption. We are of the opinion that it is unlikely that such a smooth handover of demand drivers could take place in 2014, but the machinery orders data today provides some evidence that we may have been too pessimistic. 

For more details on the data, please see our indicator page here.