June 9, 2016, 10:00 JST

Weak April machinery orders reflect uncertainty over the future of Japan

Core machinery orders, a leading indicator for private capital expenditures in Japan, dropped by 11.0% month on month in April 2016, bringing the level of orders to the lowest level in 2016 so far.

From a year ago, it is a decline of 8.2%. Orders from both manufacturers and non-manufacturers are shrinking from a year ago, by 14.8% and 3.0% respectively.

The private capital expenditure component accounts for 14% of the economy. Alongside the export and the private consumption component, it was one of the demand components Abenomics counted on to fire up the growth in Japan. Easy financing condition, soaring corporate profits due to a weak yen and most of all, a better expectation for Japan's economic outlook, were supposed to encourage corporate investment managers to start robustly investing in Japan. While capital expenditures did grow in the last few years, the rate of expansion was subdued and it seems to be losing steam since the second half of 2015. When we compare the level of corporate investment to the level of corporate profits, we see that corporate managers are being very conservative in their investment decision.

Now that the outlook for both global and domestic economy are deteriorating, it is more likely that corporate managers would be even more cautious in signing off expansive capital investment plans. In our view, the growth of capital spending in Japan is likely to remain subdued.