Japan’s machinery orders slip as trade woes hit businesses

Japan’s core machinery orders slipped in July, albeit at a slower-than-expected pace, as slowing global demand and protracted trade tensions hit corporate investment in the world’s third-largest economy.

Amid the risks to the financial outlook rise, speculation is growing that the Bank of Japan (BOJ) could ease policy at next week’s board meeting to prevent a possible spike in the yen and dampen the impact from weaker external demand.

Cabinet Office data on Thursday showed core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, fell 6.6% in July from the previous month.

The drop was smaller than a 9.9% fall seen by economists in a Reuters poll and followed a sharp 13.9% rise in June, the biggest month-on-month gain since comparable data became available in 2005.

Policymakers have been counting on resilience in corporate spending to offset risks to the global manufacturing cycle and growth from the bitter trade war between the United States and China, the world’s two largest economies.

Japan’s economy expanded an annualised 1.3% in the second quarter, revised official data showed, even as capital expenditure was downgraded to just 0.2% quarter-on-quarter growth from a 1.5% gain in a worrying sign for the outlook.

As the fallout from the US-China trade war broadens, central bank policymakers are more open to discussing the possibility of expanding stimulus at their board meeting on Sept 18-19, sources familiar with its thinking said.

The BOJ also has to factor in signs of domestic weakness such as slower household spending that suggest consumers could tighten their purse strings even before a planned sales tax hike to 10% comes in next month.

Consumer confidence deteriorated in the wake of the previous tax hike to 8% from 5% in April 2014. That, in turn, caused an economic slump.

The Cabinet Office maintained its assessment on machinery orders to say they are showing a pick up.

By sector, core orders from manufacturers advanced 5.4% in July from the previous month, rising for the first time since April, while those from the service-sector fell 15.6%, the Cabinet Office data showed.

Compared with a year earlier, core orders, which exclude those of ships and electricity, advanced 0.3% in July, rising for a second straight month, and defying expectations for a 4.5% contraction.

Meanwhile, Japanese shares posted solid gains on Thursday, with both the Nikkei and the broader Topix indexes hitting four-month highs, as signs of an easing in US-China trade frictions lifted cyclical stocks such as machine makers.

The Nikkei share average rose 0.75% to 21,759.61, while the broader Topix advanced 0.72% to 1,595.10, both reaching their highest since early May.

It was the eighth straight day of gains for the Nikkei, during which it has risen 5.5 per cent. In another positive sign, in dollar terms, the Nikkei raced to its highest levels since October.

US President Donald Trump said on Wednesday Washington has agreed to delay increasing tariffs on $250 billion worth of Chinese imports by two weeks after Beijing said it would exempt 16 types of US products from import tariffs.

“Hopes for US-China deals are driving the markets now. I expect this to continue for the next few weeks,” said Soichiro Monji, senior economist at Sumitomo Mitsui DS Asset Management. “But once any deal is done, the rally will lose momentum as the market will focus on the strength of the economy and by that time, it is possible that there will be more signs of slowdown. So now is the time to buy. If you wait, it will be too late,” he said.

Cyclical shares such as manufactures of semiconductor and robotics, which are seen as closely dependent on demand in China, rose sharply. Fanuc Corporation rallied 2.2% and Keyence Corporation gained 1.9%. Advantest jumped 4.1% and Tokyo Electron climbed 2.7% to a 15-month high.

The reversal of value-oriented stocks, such as banks and automakers that had dominated the market until Wednesday, ran out of steam. Growth stocks led gains with a rise of 0.8%, versus a 0.6% increase in value stocks.

Banking stocks fell 0.3% after rising more than 10% in the previous five sessions. Transport equipment shares, which had gained more than 8% in the last five sessions, were up 0.3%.

Online fashion retailer Zozo jumped 13.4%, having catapulted as much as 18.9% at one point, after Yahoo Japan Corporation said it aimed to buy 50.1% of its stake.

Reuters