Japan machinery orders rise more than expected in November

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Japan’s core machinery orders rose for a second straight month in November, government data showed Monday, a sign that corporate appetite for capital spending remained resilient despite pressure from soaring raw material prices.

The gain in core orders, a key indicator of capital expenditure, could be a relief to policymakers hoping for corporate investment to trigger a private demand-led recovery in the world’s third-largest economy.

Core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, grew 3.4% in November from October, rising for the second straight month, the Cabinet Office data showed.

It beat economists’ median estimate of a 1.4% rise and followed a 3.8% jump in the previous month.

However, firms could be cautious about boosting spending due to higher raw material, fuel and transportation costs that are sending wholesale inflation soaring and squeezing corporate margins.

“Firms may postpone capital spending from this quarter into the next fiscal year from April as uncertainty in the global economy has risen,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“Due to a decline in coronavirus cases and an easing of the (global) chip shortage, orders from manufacturers recovered up to November, but the outlook is unclear.”

A government official confirmed firms’ appetite for capital spending faced risks from rising raw material prices, though he added companies were still likely to spend on investments to strengthen their businesses for the future.

Compared with a year earlier, core orders, which exclude volatile numbers from shipping and electric power utilities, jumped 11.6% in November, the Cabinet office data found.

By sector, orders from manufacturers rose 12.9% month-on-month, offsetting a 0.8% drop in those from nonmanufacturers, the data showed.

The government raised its assessment on machinery orders for the first time in six months, saying they showed signs of picking up. Previously, it said a pick-up in orders was showing signs of stalling.

After contracting in the third quarter of last year, Japan’s economy is expected to return to growth in the October-December quarter.

The economy is forecast to show growth of an annualized 6.5% in that quarter, thanks largely to a projected pick-up in private consumption, which makes up more than half the economy, after an easing of coronavirus curbs.

Going forward, the omicron variant and a rebound in infections pose a renewed threat to the economic recovery.

Daily nationwide virus cases have topped 25,000 again. While low by global standards, the level is close to Japan’s record for the pandemic and could trigger renewed restrictions in Tokyo if hospital beds continue to fill up.

“The rise was driven by pent-up demand and some easing of supply-chain constraints, particularly for manufacturers. That said, the outlook isn’t completely clear. The November orders came well before omicron risks started to flare,” Bloomberg economist Yuki Masujima said.

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