• Kyodo

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Japan’s core private-sector machinery orders plunged by a record 19.5 percent in May, the government said Thursday, indicating the first consumption tax hike in 17 years on April 1 is affecting the economic outlook by discouraging companies from beefing up investment.

The orders, excluding those for ships and from utilities because of their volatility, fell following a seasonally adjusted 9.1 percent drop in April. In March, the orders soared 19.1 percent, the fastest growth since comparable data became available in April 2005, the Cabinet Office said.

The value of the orders, widely regarded as a leading indicator of capital spending, slid to ¥685.3 billion, the smallest since January 2013, prompting the government to downgrade its basic assessment of the orders.

The office said the orders are at a “standstill in their growth trend,” after saying last month they are “on a growth trend.”

Prime Minister Shinzo Abe’s government sees business investment as a pillar of economic growth. The plummet in machinery orders is likely to put a damper on optimism that a robust corporate sector can help ease the negative impact on the economy of the 3-percentage-point tax hike to 8 percent, analysts said.

Machinery orders are “very weak” and will “remain weak” for the time being, given a downturn in domestic demand in the wake of the consumption tax increase, said Koya Miyamae, senior economist at SMBC Nikko Securities Inc.

“Capital spending is set to fall in the April-June period,” after it jumped 7.6 percent, quarter on quarter, in the first three months of the year, Miyamae said.

In addition to the tax hike, a rise in energy and raw material prices subsequent to the yen’s depreciation and the recent political unrest in Iraq have sparked fears that prices will rise sharply, stifling the nascent economic recovery.

Business confidence among Japan’s large manufacturers worsened in June from three months earlier, the first such deterioration in six quarters, the Bank of Japan’s Tankan sentiment survey showed last week. The key index fell to plus 12, from 17 in March.

The world’s third-largest economy grew for the sixth straight quarter through the January-March period as the government pursued a policy mix dubbed “Abenomics” that includes drastic monetary easing by the BOJ and massive fiscal spending.

Last year, Abe’s Cabinet pledged to augment the total amount of capital spending by 10 percent during the next three years to bring it up to around ¥70 trillion, equaling the level seen before the 2008 financial crisis.

Skepticism, however, is growing about whether the government can achieve the goal, as it is still uncertain how fast Japan’s economy will bounce back after an expected dive of around 4 percent in the second quarter of 2014.

In May, orders from the manufacturing sector dropped 18.6 percent from the previous month to ¥283.5 billion, while those from nonmanufacturers declined 17.8 percent to ¥427.0 billion.

By industry, orders from the electric machinery sector and the transport and postal industry were lethargic, the office said.

Overseas demand for Japanese machinery, an indicator of future exports, fell 45.9 percent to ¥873.7 billion, following a 71.3 percent surge in April.

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