February 12, 2015 / 12:36 AM / 3 years ago

Japan core machinery orders jump in positive sign for economy

Heavy machineries are seen at a construction site in Tokyo January 14, 2015. REUTERS/Yuya Shino

TOKYO (Reuters) - Japan’s core machinery orders rose in December at the fastest pace in six months, and companies expect orders to increase in the current quarter in an positive sign that business investment will underpin a firm recovery for the recession-hit economy.

The encouraging data is a welcome relief for the Bank of Japan at a time of considerable uncertainty in the global economy, with plunging oil prices and rising deflationary pressures prompting a wave of monetary easings around the world.

The 8.3 percent month-on-month gain in core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending in the coming six to nine months, blew past the median estimate for a 2.4 percent increase.

The strength of the data was further burnished by a survey from the Cabinet Office showing companies also expect orders to rise 1.5 percent in January-March, stepping up from a 0.4 percent quarterly increase in October-December.

For the BOJ, robust capital expenditure means less pressure to further expand monetary policy in the near term, because business investment supports job creation and consumer spending - key pillars for accelerating inflation to the central bank’s 2 percent price target.

“Corporate earnings have been good recently, and companies are starting to use some of these earnings to increase capital expenditure,” said Norio Miyagawa, senior economist at Mizuho Securities.

“This is also a sign that domestic demand is doing well. You could say that the economy is headed in a direction that is favorable for the BOJ and the government.”

Capital expenditure disappointed for most of last year as companies turned cautious after an increase in the national sales tax last April knocked consumer spending and tipped the economy into recession.

However, consumers are slowly starting to open their wallets while exports also show signs of strengthening.

A weak yen is encouraging Canon Inc and other electronics makers to bring production of some goods back to Japan from overseas, which could lead to more gains in capital expenditure.

OIL CHALLENGE

Orders from manufacturers rose 24.1 percent in December, which was the fastest increase in more than eight years, Cabinet Office data showed.

Compared with a year earlier, core orders rose 11.4 percent, well ahead of the median estimate for a 5.9 percent annual increase.

The Cabinet Office raised its assessment of machinery orders, saying they are in a gradual recovery.

Inflation in Japan is slowing now due to a collapse in oil prices - core annual inflation excluding the tax-hike effect is running at 0.5 percent - but officials are counting on business investment to underwrite more jobs, higher productivity and a rise in consumer prices.

Lower oil prices could help accelerate business growth because it means cheaper fuel costs for companies and consumers. However, this does make monetary policy a more challenging exercise for the BOJ as it needs to ensure that an oil-fall induced cooling in inflation doesn’t become entrenched in inflation expectations.

BOJ Governor Haruhiko Kuroda is aiming to meet the 2 percent inflation target around fiscal 2015, but many economists and a few in the BOJ’s board say the time frame is unrealistic.

As a result, the BOJ could be forced sometime this year to expand its quantitative easing even further or loosen the time frame for its price target to make monetary policy easier to manage.

Editing by Shri Navaratnam

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