UPDATE 1-Japan machinery orders fall, dims capex outlook

Published: 11 Sep 2008 01:53:15 PST

TOKYO, Sept 11 - Japan's core private-sector machinery orders fell less than expected in July, although the data did little to ease concern about the outlook for capital spending as the nation heads into a recession.

The weak early snapshot of corporate outlays in the third quarter comes as analysts forecast an even bigger economic contraction than initially reported for the previous three months.

Core machinery orders, a highly volatile figure regarded as a leading gauge of capital spending in the world's second-largest economy, fell 3.9 percent in July from the previous month, a smaller decline than a median market forecast of a 4.3 percent drop.

That followed a 2.6 percent decline in June.

"Today's report suggests that machinery orders, which have shown relative firmness compared to other economic data, are now weakening in line with slowing production, stemming from emerging economic problems across the globe, combined with falling profits," said Tatsushi Shikano, senior economist, Mitsubishi UFJ Securities.

Compared with a year earlier, core machinery orders in July decreased 4.7 percent, against a consensus forecast of a 5.1 percent decline.

The Cabinet Office kept its assessment on machinery orders unchanged, saying they were "weakening recently."

Financial markets showed muted reaction to the data, which did not alter much the dominant market view that the Bank of Japan will hold off on raising interest rates from the current 0.5 percent until later next year.

Government officials say the economy, which shrank in the second quarter at its sharpest rate in seven years, is either heading into a recession or already in one, at least under a Japanese definition of a downturn in the economic cycle.

The economy is expected to have contracted 0.8 percent in the April-June quarter, a deeper decline than the government's initial reading of a 0.6 percent contraction, according to a Reuters poll.

Revised gross domestic product data is due out at 8:50 a.m. on Friday .

The weak reading in machinery orders underscored economists' dim outlook for corporate capital spending.

"The latest data suggests that a slowdown in capital investment is likely from the second half of fiscal 2008/09 to the next business year as the data is a harbinger of capital investment in six to nine months," said Naoki Iizuka, senior economist, Mizuho Securities.

"While the Japanese economy is widely seen to be in a recession, capital investment is not deteriorating sharply and chances of a trough in the economic cycle becoming much deeper than expected are slim."

Corporate capital spending has been a key driver of Japan's economy, whose longest post-war expansion has been a casualty of slowing global growth and high energy prices.

The government forecast core machinery orders, which exclude those for ships and equipment at electric power firms, to fall 3.0 percent in July-September after rising 0.6 percent in the previous quarter.

The BOJ is widely expected to keep interest rates unchanged when its policy board meets next week.