Japan: Weak Machinery Orders Still Suggest Stabilisation

• Despite a larger-than-expected drop in machinery orders in April, it appears that the contraction in capital expenditure is easing and export of capital goods is stabilising.
• This development is consistent with our current forecast for Japan, where private corporate investments will remain weak in the coming quarters despite our expectation of a sharp rebound in growth in H2 09.

Details

Machinery orders in April declined by more than expected. Domestic machinery orders excluding volatile items such as ships dropped by more than 5% m/m in April following a slight contraction in March. Domestic machinery orders excluding volatile items is followed closely because it is a good indicator for the development in private corporate investments within Japan. Based on the development in domestic machinery orders, it appears that corporate investment continues to contract, although the pace of contraction is easing.

Foreign machinery orders declined by more than 21% m/m following an extraordinarily sharp increase in March. Beside short-term volatility it appears that foreign machinery orders have stabilised in recent months.

Assessment & Outlook

Despite April machinery orders being weaker than expected, the overall message from today's machinery orders is that the contraction in private corporate investment in Japan is easing and Japan's export of capital goods is stabilising. Both May machine tool orders (released yesterday) and May PMI new orders suggest an improvement in machinery orders in May (see charts on next page).

As seen in the chart to the right the current development in machinery orders is consistent with our expectations that private corporate capital expenditures will continue to contract in the short run albeit at a slower pace. In the current quarter we expect private non-residential investment to contract by 3.5% q/q (please see our macroeconomic forecast on the next page). Actually the current development in domestic machinery and machine tool orders suggest that capital expenditures are stabilising somewhat faster than in our current forecast.

Danske Bank
http://www.danskebank.com/danskeresearch

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