March 14, 2016 ,10:30 JST

Strong machinery orders due to one-off factor

Core machinery orders, a leading indicator for the private capital expenditure in Japan, jumped by 15% month on month in January 2016. At 935 billion yen, the monthly level of orders in January is the highest since July 2008 and virtually at par with levels prevailing before the Lehman shock. Is the capital expenditure in Japan finally recovering? 

No so fast. When you look closer, you would observe that most of the jump in January came from one particular industry, steel. In January, machinery orders from the steel industry expanded from 13 billion in the previous month to 137 billion in January, after a seasonal adjustment. The 12-fold growth is clearly not reflecting the underlying trend when you think about the current overcapacity in the steel industry. Without the extraordinary orders from the steel industry, the level of core machinery would be slightly over 800 billion yen, at par with the average level since early 2013. While the expansion in the orders in January is a positive news, we should not take it as a sign for an upward momentum in the capital expenditure in Japan.  

In our view, despite the positive news from the machinery orders, Japanese companies are probably becoming more cautious in their capital outlay plans. According to the Business Survey published by the Ministry of Finance on March 11, surveyed companies are forecasting a cut in their capital expenditures by 6.6% year on year in the fiscal year 2016. While companies tend to publish a cautious forecast at this time of the year, it is the weakest forecast published at this time of the year since 2009. With the yen seemingly ending its 4 years depreciation cycle amidst continued deterioration in the global economic outlook, the state of the business confidence in Japan is definitely not expansionary. There are signs that the domestic business sentiment is also deteriorating as reflected in the Economy Watchers Survey. While we expect the capital expenditure in Japan to manage a modest growth, it is unlikely to be the driver for the economy in 2016.  

Economy Watchers Survey