Japan machinery orders fall as yen, Europe cloud outlook

TOKYO: Japan's core machinery orders fell more than expected in December in a sign that a strong yen and worries about slowing global growth may weigh on capital spending in the coming months.

But manufacturers expect orders to rise modestly in the first quarter of this year, suggesting that rebuilding in areas devastated by last year's earthquake and tsunami may underpin spending.

Core machinery orders, which help gauge capital spending, fell 7.1 percent in December from the previous month, data from the Cabinet Office showed on Thursday. The fall was deeper than a median market forecast for a 5.0 percent decline.

Japan's economic growth is likely to pick up at the start of this year, but policy-makers can ill afford to be complacent due to worries that a persistently strong yen will force more manufacturers to move production overseas and curtail domestic investment in plant and equipment.

"Falls in machinery orders in December and October-december were within expectations and unsurprising. Given uncertainty over the global economy, corporations held back their capital expenditure plans," said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute in Tokyo.

"It's difficult to forecast the outlook on Europe's debt problem as well as the domestic power supply issue, so corporations are probably not ready to fully implement their capex plans for the January-march quarter," he said.

Analysts expect Japan's economy to contract in the fiscal year ending in March but rebound the following year as reconstruction of the northeast coastal areas devastated by last year's disaster makes headway.

But the Fukushima radiation crisis, triggered by the March disaster, raised safety fears about nuclear power and has resulted in most of Japan's reactors staying shut, heightening fears of forced power rationing and temporary blackouts in the summer peak for electricity demand.

Companies surveyed by the Cabinet Office expect core orders, a highly volatile data series regarded as an indicator of capital spending, to rise 2.3 percent in JanuaryMarch after falling 2.6 percent in the previous quarter.

Manufacturers said they expect their orders to rise 2.7 percent in January-march, which would follow a 2.8 percent decline in OctoberDecember, the data showed.

Non- manufacturers, which include construction companies, telecoms firms and property developers, forecast their orders will gain 0.8 percent in January-march. They fell 2.3 percent in OctoberDecember.

Japan's economy shrank 0.3 percent in the fourth quarter of last year as a rising yen and disruptions to supply chains from floods in Thailand weighed on factory output, according to a Reuters poll. The data is due on Feb. 13 at 8:50 a.m.

The stubbornly strong yen has put the Bank of Japan under pressure to offer further monetary stimulus to support a fragile recovery.

The central bank is seen preferring to stand pat at a policy review ending next Tuesday but may consider further action if the yen spikes to record highs or Europe's debt crisis triggers a market shock.

The BOJ next meets on Feb. 13- 14.