Japan’s Core Machinery Orders Fall More Than Expected in July

Introduction

Japan’s core machinery orders fell more than expected in July, indicating a difficult period ahead for the world’s third-largest economy. Manufacturers are hesitant to invest due to sluggish global growth and weakness in major market China.

Key Highlights

• July core orders down 1.1% m/m vs forecast -0.9%
• Orders from manufacturers down 5.3%, biggest drop in 8 months
• Uncertainties overseas discourage investment decisions – analyst

Details

The Cabinet Office data released on Thursday shows that Japan’s core machinery orders, the leading indicator of business spending, declined by 1.1% in July compared to the previous month. This decline was larger than the expected 0.9% drop forecasted by economists. The weak demand for computers from industries including electric machinery, auto, and chemicals contributed to a 5.3% decline in orders from manufacturers, the largest drop in eight months. However, orders from “core” service-sector firms excluding shipping and electric utilities grew by 1.3%.

Year-on-Year Comparison

On a year-on-year basis, core orders contracted by 13.0%, larger than the forecasted 10.7% fall. This highly volatile data series is regarded as a gauge of capital spending in the coming six to nine months.

Policy Test

The high borrowing costs across many developed economies, including the U.S. Federal Reserve’s tightening measures, have negatively impacted global growth. Japan, being a trade-reliant nation, has been affected as well. The Bank of Japan (BOJ) is cautious about speeding up an exit from its ultra-easy policy due to these challenges. The government aims to support the economy by ensuring that wage growth exceeds inflation in the longer term and plans to compile an economic stimulus package next month.

Conclusion

The decline in Japan’s core machinery orders, along with other soft economic indicators, poses a challenge for Japanese policymakers. The uncertainties in the global economy and weak demand both domestically and overseas are hindering business investments. The government and the BOJ will need to navigate these challenges carefully to support the country’s economic growth.

Reporting by Kantaro Komiya; Editing by Chang-Ran Kim and Shri Navaratnam