February 12, 2015 / 12:41 AM / 3 years ago

UPDATE 2-Japan core machinery orders jump in positive sign for economy

(Adds details, context on BOJ policy challenge)
    * Dec core machinery orders +8.3 pct vs f'cast +2.4 pct
    * Companies forecast core orders +1.5 pct in Jan-Mar
    * Capex essential component of higher economic growth

    By Stanley White and Mari Saito
    TOKYO, Feb 12 (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
    "This is also a sign that domestic demand is doing well. You
could say that the economy is headed in a direction that is
favourable 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
    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
    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

 (Editing by Shri Navaratnam)

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