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Japan: Record plunge in machinery orders casts doubts on Japan's recovery

July 10, 2014

Core machinery orders (a leading indicator of capital spending over a three- to six-month period) recorded the largest fall on record in May, thus casting doubt whether investment can lead the country’s economic recovery. Headline machinery orders (private sector, excluding volatile orders) tumbled 19.5% over the previous month in seasonally-adjusted terms in May, which followed the 9.1% contraction recorded in April and contrasted the 0.9% increase that market analysts had expected.

Overall manufacturing orders recorded the largest drop in over five years in May, while non-manufacturing books plummeted to the lowest level since December 2004. Machinery orders from overseas, which determine future exports, plunged at the fastest pace in more than five years in the same month.

Compared to the same month last year, core machinery orders contracted 14.3% in May. The decline contrasted the 17.6% expansion tallied in April and marked a multi-year low. Consequently, the trend now points downward; annual average growth in core machinery orders decreased from 13.0% in April to 10.4% in May.

As a result of the steep drop, the Cabinet Office downgraded its assessment of machinery orders, stating that, “growth in machinery orders has come to a standstill.” In addition, the Office predicts that there will be a 0.4% increase in the second quarter following the 4.2% expansion in the first quarter.

FocusEconomics Consensus Forecast panelists expect private non-residential investment to rise 6.1% in 2014, which is up 2.3 percentage points over last month’s projection. In 2015, the panel sees private non-residential investment expanding 3.8%. In addition, FocusEconomics Consensus Forecast panelists expect gross fixed investment to increase 4.1% in 2014, which is up 0.5 percentage points over last month’s projection. In 2015, the panel sees gross fixed investment growth at 1.4%.


Author: Ricard Torné, Lead Economist

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Japan Investment May 2014

Note: Month-on-month changes of seasonally adjusted core machinery orders and year-on-year growth rate in %.
Source: Ministry of Economy, Trade and Industry (METI) and FocusEconomics calculations.


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