Japan’s core machinery orders rose for a second straight month in August, handily beating market expectations, signaling a pickup in capital expenditure that should encourage Prime Minister Shinzo Abe ahead of a general election this month.
The premier hopes to convince voters in the Oct. 22 elections that his “Abenomics” recipe of aggressive monetary stimulus, fiscal spending and reform plans has improved the economy enough to stoke a sustainable recovery.
Cabinet Office data showed on Wednesday that core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, rose 3.4 percent in August from July.
The value of core orders, which exclude those of ships and utilities’ electrical power equipment, stood at ¥882.4 billion ($7.86 billion), the highest since July 2016.
“There are uncertainties such as the outlook for U.S. President Donald Trump’s trade policy, North Korea and Japan’s political risks, but conditions surrounding capital spending remain basically favorable,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Capital expenditure will perform well in the coming one to two years.”
Analysts expect capital expenditure to pick up gradually, backed by refurbishing demand, infrastructure investment for the 2020 Tokyo Olympic Games, and spending on labor-saving equipment, as well as spending encouraged by low borrowing costs enabled by the Bank of Japan’s negative interest rate policy.
“The current level of orders remains consistent with a further increase in capital spending last quarter,” Marcel Thieliant, senior Japan economist at Capital Economics noted in a report.
“The continued recovery in capital goods shipments excluding transport equipment also suggests that the expansion in investment spending remains intact.”
Orders from manufacturers jumped 16.1 percent month on month in August, driven by general-purpose production machinery such as machine tools, while service-sector orders grew 3.1 percent, led by orders for boilers and turbines.
The Cabinet Office raised its assessment of machinery orders from stalling to showing “signs of pick-up”.
Overseas orders, which are not counted as core orders, grew 11.5 percent in August, due to some big-ticket orders including power generators and aircraft.
The BOJ’s closely-watched quarterly tankan survey showed last week that big firms plan to increase capital spending by 7.7 percent in the current fiscal year ending in March 2018, underscoring the view business expenditure is on a firm footing.
A sustained recovery in business expenditure should support the central bank’s view that a virtuous circle of private sector-led growth will take hold in the economy.
Still, wage growth and inflation remain stubbornly low despite recent signs of rebounding private consumption, keeping the BOJ under pressure to maintain its massive monetary stimulus.