Japan’s private machinery orders drop in April: near-term outlook for capex suggests only moderate growth

Japan's Views - Photo by Government of Japan

By Harumi Taguchi, Principal Economist, IHS Markit

12 June 2017


Key Points:

  • Japan’s private machinery orders excluding volatiles — a leading indicator for private capital expenditure (capex) — fell 3.1% month on month (m/m) in April, following two consecutive months of increase. A continued decline in orders from non-manufacturing, (a 5.0% m/m drop) offset a third consecutive month of growth in orders from the manufacturing sector, up 2.5% m/m.
  • Major contributors to the increase in orders from manufacturing were continued increases in orders from general-purpose and production machinery, office machinery, and automobiles and accessories, and rebounds in orders from electrical machinery, information and communication machinery, and other transportation machinery. These offset a decline after a surge in orders from non-ferrous metals and declines in orders from some other industry groupings.
  • The weakness in orders from non-manufacturing was due largely to continued declines in orders from finance and insurance, information services, and miscellaneous non-manufacturing, as well as declines in orders from construction and real estate.

IHS Markit Views:

While the weakness in orders from non-manufacturing is a concern, it is in line with the industry outlook for the second quarter. On the other hand, resilient orders from manufacturing reflected an ongoing recovery of external demand, and domestic auto sales and a solid rebound in orders from overseas suggest external demand will underpin production in the manufacturing sector and, in turn, machinery orders.

Nevertheless, IHS Markit maintains its view that Japan’s capital expenditure is likely to remain moderate over the near term, given that uncertainties over the global economy and concerns about higher costs relative to weak domestic demand will keep companies cautious about increasing capex.