Japan’s core private-sector machinery orders rose a seasonally adjusted 10.4 percent to 1.11 trillion yen ($10.3 billion) in May from April, the second straight monthly increase and well ahead of market expectations, data from the Cabinet Office showed on Wednesday.

Economists had forecast a 0.8 percent increase in orders for the month, following a 5.5 percent rise in April. The May reading was the fastest since January when orders rose 17.3 percent.

Despite the stronger than expected increase, the government stuck to its view that machinery

orders have been weakening recently.

Core private-sector machinery orders, which exclude orders from electric utilities and for ships,

are a leading indicator of corporate capital spending. They account for nearly 15 percent of the world’s second-largest economy.

While most analysts believe that corporate capital spending is on the verge of falling due to growing downside risks to corporate profits, a senior economist at the Cabinet Office said the latest data suggested that orders “are not likely to fall dramatically.”

“But given the volatility of these statistics, we need to assess how orders will do in June” before making any change to the assessment, the official said.

Machinery orders rose 5.1 percent in May from the same period last year after rising 0.5 percent in April. Total orders rose 10.8 percent to 2.84 trillion yen for the month and were up 3.6 percent from a year ago.

RBS Securities chief economist Mamoru Yamazaki said the “stronger-than-expected reading

suggests that the pace of deceleration in capital investments will be modest.”

Core machinery orders are forecast to fall 10.3 percent in the three months to June from the previous quarter, which the government said is on track even if orders fall by a sharper than expected 33.8 percent in June.

“The possibility of achieving the forecast is very high,” the official said.

Takeshi Minami, senior economist at Norinchukin Research Institute, said the latest data showed that worries about profits dropping due to rising material costs and slowing demand have not affected the investment stance of Japanese companies.

“Japanese manufacturers which put a higher premium to staying competitive from a long-term viewpoint, apparently are looking past the short-term threat to their profits,” Minami said.

“But whether capital investments can continue rising will depend largely on corporate profits,” Minami said.

The Bank of Japan’s Tankan survey for the June quarter, released last week, showed that the

combined pretax profit of all non-financial firms is projected to fall 4.4 percent in the current year to March 2009, against a previous forecast for a 2.4 percent rise.

“If crude oil prices keep rising, the combined pretax profit may fall at double-digit pace this

fiscal year, and if this happens, Japanese companies may have to cancel some of their investment plans,” NLI Research Institute senior economist Taro Saito said.

Economist Norio Miyagawa from Shinko Research Institute only expects machinery orders to pick up in the next fiscal year to March 2010 when the U.S. economy improves and there is some stability in oil prices.

Source: http://www.afxnews.com

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