Japan August core machinery orders point to more capital spending gains

TOKYO — Japan’s core machinery orders unexpectedly rose in August after robust gains in the previous month in a sign that capital spending is set to grow as companies invest in new equipment and software to manage labor shortages.

The 6.8% increase in core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending, compared with the median estimate for a 4% decline in a Reuters poll.

In July core orders rose 11.0%, the fastest increase since January 2016.

Japanese companies’ capital expenditure plans remain strong for the current fiscal year, a Bank of Japan (BoJ) tankan survey showed last week, as companies increase investment in automation and labor-saving technologies.

The trade war between the US and China poses a risk to the outlook because it could indirectly reduce sales from China, making some Japanese manufacturers less likely to buy new equipment.

“Japanese companies are following through on their bullish capital expenditure plans,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“There were concerns that companies would reign in capital expenditure due to worries about trade friction, but this isn’t happening. Capex will continue to rise as long as trade friction doesn’t become more intense than it is now.”

Orders from manufacturers rose 6.6% in August, following an 11.8% increase in the previous month, due to increased orders from auto manufacturers and the steel sector.

Service-sector orders rose 6% in August, versus a 10.9% increase in the previous month as orders from companies in freight shipping.

Orders from financial services companies also rose as they install automatic reception systems because of labor shortages.

The Cabinet Office upgraded its assessment of machinery orders, saying they are in recovery.

Big companies plan to increase capital expenditure by 13.4% in the current fiscal year ending in March 2019, the BoJ’s tankan survey for September showed last week, a shade lower than the previous tankan’s 13.6% increase.

But the International Monetary Fund cut its forecasts on Tuesday for global economic growth, partially due to the SinoUS trade war.

Japanese manufacturers are sensitive to developments in global trade because they export large numbers of machines and parts to China where they are used to make finished goods for the US and other markets.

Machinery orders from overseas rose 7.8% in August, faster than a 6% increase in the previous month, which may temporarily ease concerns about export demand. —