Japan Core Machinery Rises Less than Expected

Japan’s core machinery orders increased less than expected in October following an earthquake in the previous month, indicating a more subdued business investment as earnings growth slows and as trade protectionism increases headwinds for the economy.

The 7.6 percent rise month on month in core machinery orders, considered a leading indicator of capital expenditure, undershot the median estimate for a 10.5 percent gain. That followed a record slump of 18.3 percent in September, when an earthquake struck northern Japan and floods disrupted business in western parts of the country.

That rebound in machinery orders could be short-lived as the US-China trade war, Japan’s looming trade talks with the United States, and a slowdown in overseas economies are expected to weigh on corporate sentiment.

Highlightinng the risks to the outlook, the Cabinet Office lowered its assessment of machinery orders to say there are signs that the recovery is stalling.

Weakening capital expenditure puts Japan’s government in a bind, because policymakers have long predicted that gains in business investment to cope with shrinking labor force would boost growth and protect it from risks posed by overseas economies.

“Downside risks have increased, because underlying demand is weakening and companies are worried that trade friction will hurt overseas profits,” said Hiroshi Miyazaki, who is the senior economist at Mitsubishi UFJ Morgan Stanley Securities. “The government has already drawn up extra spending plans, which highlights how worried they are about the economy.”

Earnings growth at Japanese manufacturers is already being crippled by the US-China trade dispute, with several companies downgrading their profit forecasts recently due to cooling demand.

Orders from manufacturers gained 12.3 percent on-month in October after a 17.3 percent slide in September, because of an increase in orders from auto makers and oil refiners, according to the data.

Service-sector orders gained 4.5 percent, coming after a 17.1 percent decline in the previous month, due to orders from shipping companies and railway operators.

“Core” machinery order exclude those ships and from electricity utilities.

Policy makers and investors are worried that international trade tensions and slowing global growth could hurt Japan’s export-led economy.

Japan’s government will spend about 3 trillion yen ($26.6 billion) in a second extra budget for this fiscal year to bolster infrastructure, support farmers and deal with natural disasters, two government sources with direct knowledge of the matter said.

The Bank of Japan’s quarterly tankan business sentiment poll is estimated to show big manufacturers’ confidence worsened for a fourth straight quarter in December due to uncertainties over the global economy and the China-US trade conflict.

The BOJ will release the data on December 14. Corporate sentiment is also closely monitored since companies usually cut capital expenditure when they grow less confident about the future.

In another warning sign, Japan revised down on Monday gross domestic product in third quarter to show the biggest economic contraction in more than four years, hurt by a steep decline in capital expenditure.

This month in Argentina, US President Donald Trump and Chinese President Xi Jinping agreed a truce that delayed the US increase of tariffs of Chinese goods.

On the other hand, there are worries that this truce will not hold after Canada’s arrest of Chinese tech company Huawei’s chief financial officer for extradition to the United States.

US automakers and labor unions have also indicated they want to cap the yen’s weakness and limit the number of Japanese auto imports in trade talks with Tokyo expected next year, which could also put a dampener on investments on businesses.