By Harumi Taguchi, Principal Economist, IHS Markit
Japan’s private machinery orders excluding volatiles, rose by 5.6% month-on-month (m/m) in October following an 8.1% drop in the previous month. The improvement reflected a 7.4% rise in orders from the manufacturing sector following a 5.4% drop the previous month, and a modest 1.1% rise following an 11.1% drop in orders from the non-manufacturing sector.
The rebound in orders from manufacturing was largely driven by orders from chemicals, general-purpose and production machinery, and information and communication electronics equipment, as well as continued increases for orders from electrical machinery.
Four consecutive months of increased orders in the miscellaneous manufacturing grouping suggests broader intent of manufacturers to increase fixed investment on account of improved corporate profits.
The increase in orders from non-manufacturing reflected improvements in orders from transportation and postal activities and wholesale and retail sales, which were partially offset by declines in orders from construction, finance and insurance, real estate, goods leasing, and some other industry groupings.
IHS Markit View:
The uptrend in orders from manufacturing was in line with our expectations. Expectations also played out well for manufacturers’ who had relatively solid fixed investment plans for fiscal year 2017, suggesting capital expenditure will continue to increase through to the first quarter of 2018.
Improved corporate profits and ongoing demand for semiconductors and related machinery are likely to drive near-term machinery orders from manufacturers; however, outpacing relative to manufacturers’ outlooks for the fourth quarter of 2017 and concerns about a rapid increase of production capacity could weigh on orders from manufacturing.
A sustained increase for machinery orders will probably require stronger demand to increase productivities and to counter labor shortages with machinery and equipment, particularly from the non-manufacturing sector.