Japan's Core Machinery Orders Fall Unexpectedly for Second Consecutive Month, Raising Concerns About Economy's Fragility
In a surprising turn of events, Japan's core machinery orders have declined for the second month in a row, according to government data released on Thursday. This downward trend, which saw a 3.2% drop in May following a 2.9% decrease in April, has caught analysts off guard as they had predicted a 0.8% increase.
The decline in machinery orders could pose a challenge for the Bank of Japan's efforts to normalize monetary policy, especially after the central bank raised rates for the first time in over a decade in March and reduced government debt purchases in June. The Cabinet Office, responsible for compiling the data, has also revised its outlook on machinery orders, noting signs of a slowdown in the pick-up.
It is important to note that the core orders exclude certain sectors like shipbuilding, repairs, and electricity power generation which are known to be volatile. External orders, which include exports, make up a significant portion of overall orders, while domestic core orders account for 30%.
Despite the recent decline, core orders have increased by 10.8% compared to the same period last year, indicating potential growth in capital spending over the next six to nine months. However, a survey conducted by the Cabinet Office suggests that core orders are expected to decrease by 1.6% in the second quarter.
Capital spending remains a bright spot in Japan's economy, driven by demand for labor-saving technology, digital transformation, and green initiatives to enhance productivity and address labor shortages. The government has set ambitious targets for domestic investment to exceed 100 trillion yen ($619.08 billion) by 2028.
Recent GDP data revealed a 0.4% decline in private non-residential investment in the first quarter, with capital spending and consumer spending being identified as key factors behind the economic contraction. This highlights the importance of monitoring machinery orders and their impact on overall economic growth.
In conclusion, the unexpected decline in Japan's core machinery orders raises concerns about the economy's resilience and the potential challenges for the Bank of Japan in normalizing monetary policy. Investors and policymakers should closely monitor future developments in capital spending and domestic investment to gauge the overall health of the economy.