Raymond Van Der Putten
BNP Paribas
Machinery orders came in surprisingly weak in February as they are not anymore underpinned by last-minute procurement before the April VAT hike. However, overseas and government orders strengthened. Exports and government spending could become the main engines for growth in the coming quarters.
Machinery orders came in surprisingly weak in February. Core orders, i.e. excluding those for ships and from electric power companies, declined by 8.8%, whereas the market had expected a fall by around 3%. They are on a firmly downward trend. In the three months to February, they were about 5% (21.6% annualised) lower from the preceding three-month period.
Today’s results confirm previous reports that new orders received have been falling as they are not anymore underpinned by last-minute procurement before the April consumption tax increase. Moreover, given the expected decline in output after the tax increase, firms have been reluctant to step up their investment. For example, the March Tankan reported an expected 4.2% decline in investment during the current fiscal year compared with a 5.2% increase in FY2013.
Today’s data also contained some positive news. Overseas orders, which are not part of core orders, rose by 2.4%, marking the third consecutive month of increase. This development is partly related to the offshoring of industrial activity. Japanese overseas subsidiaries are often placing their orders at Japanese based companies.
In addition, with the domestic market in the doldrums, Japanese enterprises might be stepping up their sale efforts in overseas markets by making more price concessions. External trade is likely to become one of the main engines for growth.
Moreover, government orders strengthened by 6.2%, albeit after a 13.9% fall in January. They are likely to strengthen further in the coming months as the stimulus plan intended to partly offset the negative effect of the VAT hike is being implemented. The plan is worth about JPY 5 trillion or 1% of GDP.
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