March 13, 2019 / 12:39 AM / a year ago

Japan's machinery orders weaken as trade war hits spending plans

TOKYO (Reuters) - Japan’s machinery orders fell in January at the fastest pace in four months as the U.S.-China tariff war hit global trade, knocking demand from the country’s auto and telecommunications equipment manufacturing sectors lower.

FILE PHOTO - A crow stays on a crane at a factory at the Keihin industrial complex in Kawasaki, near Tokyo June 13, 2011. REUTERS/Toru Hanai/File Photo

The 5.4 percent decline month-on-month in core machinery orders, a leading indicator of capital expenditure, was more than the median estimate for a 1.7 percent decrease and followed a revised 0.3 percent decline in the previous month. It was also the fastest month-on-month decline since September last year.

Economists say uncertainty over Sino-U.S. trade policies would discourage an increase in capital expenditure in Japan’s corporate sector, which has up until recently been one of the better performing parts of the economy.

While the United States and China have in recent weeks openly sought to narrow their differences over trade, they are yet to agree to a deal that would unwind punitive tariffs and restore global trade flows.

“It’s fair to say the outlook for capital expenditure in Japan is not bright,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“There is confusion about the status of U.S.-China trade negotiations. This could make Japanese companies more pessimistic, which is a risk for capital expenditure plans in the new fiscal year.”

The weak capex also suggests that after more than six years in office, Japanese Prime Minister Shinzo Abe may struggle to keep the economy on track while the Bank of Japan faces pressure to prop up growth with some form of stimulus.

Highlighting the weakness in the global economy, core machinery orders from overseas fell 18.1 percent in January, Cabinet Office data showed on Wednesday, matching December’s contraction, which was the largest decline since January 2016.

“Core” machinery orders exclude those for ships and from electricity utilities.

Orders from manufacturers fell 1.9 percent month-on-month in January after a revised 4.4 percent decline in December.

Non-manufacturing orders slumped 8.0 percent, also the fastest month-on-month decline in four months. Capex plans have been generally healthy in recent years but the deterioration in trade raises the risks companies may now trim their spending plans in the new fiscal year, which would impact broader activity, economists say.

Most Japanese firms commence their fiscal years in April, which is when they are expected to draw up capital expenditure and investment plans.

In a warning of the damage to come, a finance ministry survey on Tuesday showed companies plan to cut capital expenditure by 6.2 percent in fiscal 2019, versus a 7.4 percent increase in fiscal 2018.

That bodes poorly for the BOJ’s closely watched tankan survey due on April 1, which measures corporate sentiment and spending.

Another risk for Japan’s economy is the government’s plan to raise the nationwide sales tax to 10 percent from 8 percent in October. The government needs the extra revenue for rising welfare costs, but the tax hike could also weaken consumer spending.

Japan’s central bank ends its two-day monetary policy meeting on Friday and is likely to maintain its view the export-reliant economy is expanding moderately but warn of heightening overseas risks, sources say.

Reporting by Stanley White; Editing by Sam Holmes

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