Japan's machinery orders rebound in sign of capex recovery

TOKYO (Reuters) -Japan’s core machinery orders rose in July after a dip the previous month, a sign corporate spending is perking up despite the wider hit to the economy from the pandemic.

However, the weaker-than-expected rebound may add to concerns about the strength of Japan’s recovery, which has largely relied on manufacturers and other export-oriented businesses as curbs dampen domestic consumption.

Core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending in the next six to nine months, rose 0.9% in July from the previous month, weaker than the 3.1% gain seen by economists in a Reuters poll.

It followed a 1.5% dip in the prior month.

“The manufacturing sector is strengthening with the tailwind of recovery in the global economy, while non-manufacturing is weakening with downside pressures from the worsening COVID-19 outbreak – the contrast is becoming clearer,” said Masato Koike, an economist at Dai-ichi Life Research Institute.

The Japanese economy is at risk of slipping back into contraction in the current quarter as the COVID-19 pandemic hits private consumption and manufacturing.

Adding to worries about the outlook, manufacturers’ mood fell to a five-month low in September, the Reuters Tankan, showed.

The mixed data comes as the ruling party’s leadership race heats up. The winner of the Liberal Democratic Party’s Sept. 29 leadership contest is expected to become prime minister and will need to lay out a growth strategy to get cautious Japanese firms to spend their massive piles of cash here.

By sector, orders from manufacturers rose 6.7% month-on-month in July marking a fourth straight month of increase, while service-sector orders tumbled 9.5%. Industries such as electric machinery led manufacturers, but construction, wholesale and retail industries dragged on service-sector orders.

External orders, which are not counted as core orders, rose 24.1%, rebounding from the previous month’s 10% drop thanks to robust demand for semiconductor-making machines.

“External orders turned out good, but it’s a volatile measure and does not seem to extend the growth going forward,” said Shintaro Inagaki, senior market economist at Mizuho Securities, pointing to the Delta outbreak and China’s slowing economic recovery as downside risks.

Compared with a year earlier, core orders, which exclude those for ships and electricity utilities, grew 11.1% in July, below a 15.7% jump forecast by economists, the data showed.

The Cabinet Office maintained its assessment on machinery orders, describing them as showing signs of “picking up.”

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