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January surge logs second-fastest rise on record as firms invest

Machinery orders up 13.4%

by Tomoyuki Tachikawa

Kyodo

Core private-sector machinery orders surged by a seasonally adjusted 13.4 percent in January, the second-fastest pace on record, signaling that an economic rebound has prodded companies to boost investment, the government said Thursday.

The orders, excluding those for ships and from utilities because of their volatility, rose to ¥843.5 billion after plunging 15.7 percent in December, the Cabinet Office said.

It was the second-sharpest month-on-month gain seen in the orders, widely regarded as a leading indicator of capital spending, since April 2005, when officials began compiling comparable statistics.

Among wages and economic structural reforms, Prime Minister Shinzo Abe is eager to bolster investment to beat nearly two decades of deflation with a plan based primarily on aggressive monetary easing.

The government left its basic assessment of the orders, which are traditionally volatile, unchanged, saying for the third month in a row that they are “on a growth trend.”

But capital spending, which Abe sees as a pillar of economic growth, is expected to shrink amid growing concern that the consumption tax hike to 8 percent in April will stifle personal spending and in turn hurt the broader economy, analysts said.

Business investment expansion “would peak in early fiscal 2014, as firms may take a wait-and-see attitude to gauge how the economy will move after the tax hike,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.

Growing worries that a slowdown in emerging economies could drag down the global economy will also make the corporate sector reluctant to aggressively build plants and buy new equipment, Minami added.

“It is very important for the government to make serious efforts to improve the investment environment by taking measures such as cutting the country’s effective corporate tax rate,” he said.

Capital spending accounts for around 15 percent of Japan’s gross domestic product.

In January, orders from the manufacturing sector gained 13.4 percent to ¥331.8 billion, having declined the previous month, while those from nonmanufacturers rose following a drop in December, up 12.1 percent to ¥511.0 billion.

By industry, orders from the electric machine industry and the chemical sector were robust, the Cabinet Office said.

Overseas demand for Japanese machinery overall, an indicator of future exports, edged up only 2.7 percent to ¥864.5 billion after rising 8.6 percent in December.

The result may dampen optimism that an expected downturn in the world’s third-biggest economy after the first tax hike could be eased by expanding exports, economists said.

The government-linked Japan Center for Economic Research said last week that GDP is forecast to contract by an annualized 4.1 percent in real terms in the April-June quarter, citing the average projection of 41 private-sector economists.

If the economy stalls, that would prevent Abe from attaining his goal of augmenting total capital spending by 10 percent in the next three years to around ¥70 trillion, the same level before the 2008 financial crisis.

The target was set in June last year in the government’s economic growth strategy — the “third arrow” of Abe’s “Abenomics” plan, along with drastic monetary easing by the Bank of Japan and massive fiscal spending.

The first sales tax hike is aimed at covering swelling social security costs for the graying population.