Machinery Orders Maintain Momentum

Machinery orders increased by 4.4%, mainly due to the volatile elements such as orders from electric power companies. Another reason was the surge in government orders, as the JPY10 trillion fiscal stimulus announced at the beginning of the year is being implemented.

■ By contrast, core machinery orders, a harbinger for business investment, were flat, whereas we had expected a decline. As a result, they remain at a very high level. In the six months to July, they were almost 15% higher (annualised) than during the preceding six month period.

■ This substantial increase in orders has boosted capital spending. In Q2, private non-residential investment was 1.3% higher on the previous quarter. This was mainly due to the non-manufacturing sector (+ 4.7% against -0.6% in manufacturing). Today’s data indicate that the increase in orders from the manufacturing sector, already observed in May and June, is continuing. In July, they were 4.8% higher from the previous month. In the sixth month to July, their annualised growth rate was even above 10%. Non-manufacturing orders are much more volatile. They were flat in July after a 17.5% decline in the preceding month.

■ Also overseas orders – not part of core orders -- have considerably improved, thanks to the depreciation of the yen since last November. In July, they were 3.7% higher from a year earlier. This chimes with observations by the Economy Watchers. In the Chugoku region, the westernmost region of the main island Honshū, entrepreneurs in the iron and steel reported that export-related companies are feeling busy.

■ However, this momentum is not yet being felt among manufacturers operating mainly for domestic users. The problem is that they have been confronted by higher prices for energy and other imported commodities, and find it difficult to pass these on to their customers. Moreover, they fear that the economy might slow significantly after the 3 point VAT hike planned for next April. Indeed, part of the current dynamics of the economy may be related to customers bringing purchases forward ahead of the hike.

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