By Harumi Taguchi, Principal Economist, IHS Global Insight
Key Points:
Ÿ Japan’s private machinery orders excluding volatiles, a leading indicator for private fixed asset investment, rose by 6.7% month on month (m/m) in December 2016 following a 5.1% drop in the previous month. The improvement showed a 1.0% m/m increase in orders from manufacturing, and a 3.5% m/m increase in orders from the non-manufacturing sector (excluding volatiles) following a 9.4% drop from the previous month.
Ÿ The December figures were stronger than expected, partially reflecting improved capacity utilization in manufacturing from strengthened external demand. However, private machinery orders excluding volatiles declined 0.2% from previous quarter in the fourth quarter of 2016, suggesting fixed investment in machinery remains weak.
Ÿ The increases for orders from manufacturing largely reflect surges in orders from ceramic, stone and clay products, petroleum and coal products and chemical and chemical products, as well as continued increases in orders from non-ferrous metals, general-purpose and production machinery. These orders were enough to offset declines in electrical machinery, automobiles and accessories and other industry groupings. The rebound in orders from non-manufacturing was attributed to continued growth for construction and recoveries for transportation, goods leasing, and real estate.
IHS Global Insight Views:
The industry anticipates private machinery orders (excluding volatiles) to increase by 3.3% quarter to quarter (q/q) in the first quarter of 2017, driven by an 11.6% rise in orders from manufacturing. While the weak yen and improved external demand seem to be encouraging manufacturers to go ahead with their fixed investment plans toward the end of fiscal year (March 2017), the outlook for a contraction of 19.4% q/q in orders from overseas following a surge in the fourth quarter raises doubts about the sustainability of a solid recovery in external demand.
Weak overall trends suggest near-term private investment in machinery and equipment is poised to remain sluggish, although strengthening for external demand and public works will support the uptrend in industrial production and near-term machinery orders from manufacturing. Uncertainties over US policy and concerns about volatile foreign exchange rates may prove difficult for companies to map out investment plans for the new fiscal year, thus, weighing on capital expenditure.