Insufficient Factory Order Rebound

As expected, machinery orders rebounded although they remained on a downward trend. Despite very favourable financing conditions, companies are scaling back their capital spending due to lack of domestic investment opportunities. The government’s new growth strategy might fall short of what is required.

As expected, machinery orders rebounded by 4.6% in February. Nevertheless, orders were 11.4% lower from a year earlier.

The improvement in orders is in line with earlier published survey data. Participants in the Economy Watchers Survey observed an increase in order receipts in corporate activity-related businesses, which was related to overseas orders due to the recovery of price competitiveness following the yen’s depreciation. These orders rebounded by 8% after having sharply fallen in December and January by 12.6% and 4.8%, respectively. The weak results in previous months are partly related to the Chinese New Year and the political tensions between Japan and China.

Hints At Capital Spending
Financial markets concentrate on core machinery orders, i.e. domestic private orders excluding those for ships and from electric power companies, which are considered to be a leading indicator for capital spending. These orders also rebounded, by 7.5% after a 13.1% drop in January. However, they remained on a declining trend.

The government’s very accommodative policy has not only resulted in a weakening of the yen but also boosted stock prices. This could stimulate capital expenditure by making it easier for companies to raise money in the capital market. However, it is probably not the lack of financing that is holding back capital expenditure. The non-financial corporate sector has already a substantial financial surplus (3.7% of GDP in Q4 2012). This signals a lack of domestic investment possibilities.

This is also confirmed by the March Tankan. Large and medium-sized companies reported that monetary conditions remained very accommodative. Moreover, even though they expected a 5.9% increase in profits in the current fiscal year (April 2013- March 2014), they intended to scale back their investment spending (-3.9% after +6% in FY2012).

BY Raymond VAN DER PUTTEN

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