Business / Economy

Steepest drop in Japan machinery orders for five years raises recession worries

Bloomberg, Reuters

The value of core machinery orders slipped for the second consecutive month in August, suggesting uncertainty over businesses investment and deeper fissures in the broader economy due to slowing global trade.

A highly volatile data point regarded as an indicator of capital spending in the coming six to nine months, core orders fell by 2.4 percent in August from the previous month, Cabinet Office data showed on Thursday.

According to data from Refinitiv, the orders — which exclude those related to shipping and electricity — were down 14.5 percent in August compared to a year earlier in the biggest year-on-year drop since November 2014. The figures have added to concern the world’s third-biggest economy may be heading for a recession.

Japan’s economy has relied on robust domestic demand and capital spending to sustain growth in recent quarters, amid a global slowdown that has hammered its export sector. Machine orders are a leading indicator of capital expenditure to come, although they are volatile from month to month.

The latest data is particularly worrying as it shows orders from the nonmanufacturing sector fell 12.1 percent from a year ago. While the hit from slow overseas demand has hit Japan’s big product exporters, the domestic-orientated service sector has kept the economy expanding. If weakness in investment spreads beyond Japan’s factories to the wider economy, an expected slowdown could turn into a recession.

“The fall among nonmanufacturers is a big deal,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Wages and incomes, including winter bonuses, are struggling to rise, which is weighing on nonmanufacturers bit by bit.”

Economists already forecast the economy will shrink 2.7 percent in the final quarter of this year as a sales tax increase that took effect on Oct. 1 squeezes spending.

Thursday’s report follows figures released Wednesday for the tools and equipment used for machinery — data that is seen as an even earlier indicator of capex. According to the figures, machine tool orders plunged more than 30 percent for the fifth time this year in September.

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