TOKYO (Reuters) – Japan's core business orders fell for a maximum of eight months in a worrying sign that global trade tensions are charging a corporate investment, doubting that solid domestic demand can help offset external pressure on export-dependent economies.
FILE PHOTO: Construction cranes are reflected in mirrors at a composition in Tokyo February 12, 2015. REUTERS / Thomas Peter / File Photo
Any decline in corporate expenses will damage the prospects for stronger wage growth and curb the central bank's hopes that a sustained economic recovery will allow companies to increase prices and wages, and help achieve their 2 percent inflation target.
Cabinet office data on Monday showed that core orders, a highly volatile data series considered as an indicator of capital expenditure over the next six to nine months, fell 7.8% in May from the previous month.
Reading, the biggest decline since September 2018 and down for the first time in four months, compared to a fall of 4.7% by economists in a Reuters poll and followed a 5.2% increase in April.
Politicians expect domestic demand to compensate for risks such as the trade war in Korea and the United States and reduce global demand that threatens to track the world's third largest economy.
Investments have been a bright spot in the fragile economy, contributing to an increase in gross domestic product by an annual rate of 2.2% in the first quarter.
However, external risks are pushing the prospect of Japan's export-dependent economy, which will weigh on Japanese business confidence and could again lead to capital spending.
There may be concerns about domestic demand, just as Prime Minister Shinzo Abe's government is striving to increase its national sales to 10% in October.
"Despite a decline in May, machine orders point to largely stable capital expenditures in the second quarter. Nevertheless, we expect investment growth to fall sharply in the coming quarters," says Marcel Thieliant, senior economics economist in Japan.
"Resilience is unlikely to last. Companies have revised their capital expenditure plans in light of weaker external demand. And consumer spending is set to retire after October's sales tax. "
The previous tax route to 8% from 5% in April 2014 gave a blow to consumers and triggered a deep economic downturn. Since then, Abe has delayed twice a planned sales tax increase.
The Cabinet Office maintained its assessment
By sector, core orders from manufacturers fell 7.4% in May from last month, fluctuating sharply lower than last month's 16.3% gain, while those from the service sector fell 9, 0%, down for the first time in three months, showed the government's office data.
The data comes a week after the bank in Japan quarterly tanker survey showed solid Japanese business spending plans, with large companies planning to increase their investment spending by 7.4% in fiscal year to March 2020.
BOB will examine the tanker results and a number of other indicators in its policy setting meeting later in the month when issuing fresh finances and price projections.
Japan's capital expenditure has been driven by the demand to increase labor-saving technology to cope with a work cream in the rapidly growing population, high-tech investment and upgrading of old plant and equipment.
Reporting by Tetsushi Kajimoto; Editing by Jacqueline Wong