Japan’s machinery orders unexpectedly rose for a third straight month in April, signaling solid business investment, though analysts expect an intensifying Sino-U.S. trade war and global slowdown to hurt capital spending plans in the coming quarters.
The upbeat data may solidify expectations that a planned sales tax hike will go ahead in October, and offers some support for an economy hampered by faltering exports, slowing corporate earnings and factory activity.
Cabinet Office data released on Wednesday showed core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, increased 5.2 percent in April from the previous month. It marked the biggest gain since last October, and compared with economists’ median estimate of a 0.8 percent decline in a Reuters poll. In March, orders rose 3.8 percent.
Capital spending has been a bright spot in the world’s third largest economy, driven by investment in high-tech and labor-saving technology to cope with a labor crunch in the ageing society and refurbishing demand for upgrading old plants and equipment.
All the same, Japanese firms may turn cautious about boosting investment if uncertainty over the global economy and the bruising U.S.-China trade dispute persist, analysts say.
Underscoring the pressure on export-reliant Japan, external orders, which do not account for ‘core orders’ tumbled 24.7 percent month-on-month in April, reversing from the prior month’s 9.0 percent gain and posting the biggest drop since November 2015.
“We think that rising uncertainty over the economic outlook will result in a slowdown in business investment growth over coming quarters,” said Marcel Thieliant, senior Japan economist at Capital Economics.
Washington and Beijing have been locked in a tit-for-tat tariff war for nearly a year, which has curbed global trade and upended supply chains ranging from Asia to Europe, undermining Japan’s exports and factory output.
Investors expect Japanese exporters’ earnings will remain under pressure. Japanese companies are likely to report a 1 percent drop in pre-tax profits this fiscal year through March, Daiwa Securities said last month. Big companies such as factory-robot makers Yaskawa Electric Corp and Fanuc Corp, as well as Mitsubishi Electric Corp and trading house Mitsui & Co have blamed the trade war and China’s slowdown as they cut profit forecasts.
Still, solid domestic demand could dampen speculation that Prime Minister Shinzo Abe may once again postpone a twice-delayed sales tax hike to 10 percent from the current 8 percent in October.