Japan’s core machinery orders fell more than expected in April, casting doubt on the strength of companies’ capital spending and potentially dragging on economic growth in the current quarter. The 3.1 percent fall in the core orders from a month earlier was much bigger than the 1.3 percent decline expected by economists in a Reuters poll. It also marked the first drop in three months, following a 1.4 percent increase in March, the Cabinet Office data showed. Though the machinery orders data is highly volatile, it is regarded as an indicator of capital spending in the coming six to nine months. The reading follows a surprisingly sharp downward revision to first-quarter economic growth, as a reduction in inventories put annualised growth at 1.0 percent, much slower than the initially estimated 2.2 percent. However, a recent run of indicators suggest economic momentum continued in the current quarter thanks to solid exports and factory output, although wage growth and household spending remain lacklustre despite a tight job market.
Policymakers are hoping that Japanese firms will tap their hefty profits to spur investment and boost wages to stoke a sustainable growth cycle. “Capital expenditure will likely remain lacklustre in the current quarter,” said Koya Miyamae, senior economist at SMBC Nikko Securities. “Exports and factory output are performing well on the back of global economic recovery and a weak yen, but uncertainty over U.S. President (Donald) Trump’s trade policy makes Japanese firms hesitant about domestic investment.” By sector, core orders from manufacturers rose 2.5 percent in April, following a 0.6 percent gain the previous month. Orders from the services sector fell 5.0 percent, after a 3.9 percent decline in March. Orders from abroad, which were not counted as core orders, jumped 17.4 percent in April, up for the first time in three months. The Cabinet Office stuck to its assessment of machinery orders, saying the pick-up was stalling. Compared with a year earlier, core orders, which exclude ships and orders from the electric power utilities, grew 2.7 percent in April, well below a 6.3 percent gain expected by economists in a Reuters poll. They had slipped 0.7 percent in March on-year.