Japan machinery orders fall less than expected, suggesting firmer capex

October 11, 2016 9:27 PM EDT

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By Tetsushi Kajimoto

TOKYO (Reuters) - Japan's core machinery orders fell much less than expected in August, suggesting a relatively firm pickup in capital expenditure that is seen as crucial for sustainable economic growth.

Cabinet Office data 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, fell 2.2 percent in August from the previous month.

That fall was much smaller than the 5.5 percent decline expected by a Reuters poll of economists, following a 4.9 percent increase in July.

Compared with a year earlier the core orders, which exclude ships and orders from the electric power utilities, increased 11.6 percent in August, versus a 6.5 percent gain expected by economists.

Japanese policymakers are counting on capital spending to foster sustainable growth in the world's third largest economy, but businesses have been slow to invest in the face of sluggish demand, the yen's gains and external headwinds.

Capital expenditure has recently shown some signs of a pickup as demand for smartphones has kept the information and technology sector humming, although some analysts doubt it is sustainable.

"Capital spending is holding firm although it is not so strong as being a driver of GDP growth," said Yuichiro Nagai, economist at Barclays Securities.

"The risk would be a spike in the yen beyond 100 to the dollar, which would discourage manufacturers to invest."

In August, manufacturers' orders fell 4.0 percent, dragged down by sectors such as steel and chemicals, while the services sector's orders declined by 1.9 percent, weighed by weak demand from the communications and agriculture sectors.

The Cabinet Office maintained its assessment of machinery orders, saying a pickup was seen, with an official saying that the core orders would rise 8.5 percent in the third quarter even if they turn flat in September.

The Bank of Japan's tankan survey showed this month that big firms plan to raise capital spending by 6.3 percent for fiscal 2016 from the previous year, suggesting there is still appetite for investment despite the yen's gains.

Japanese companies have been hesitant to boost investment in recent years, due to uncertainty over the economic outlook, even as they reaped record profits thanks to a weak yen under Prime Minister Shinzo Abe's aggressive stimulus policy.

Capital expenditure grew about 5 trillion yen ($48.59 billion) over the past three years to some 70 trillion yen in fiscal 2015 – still 10 percent below levels seen in fiscal 2007 just before the global financial crisis - while net profits rose about 15 trillion yen.

(Reporting by Tetsushi Kajimoto; Editing by Eric Meijer)

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