TOKYO (Reuters) – Japan's core machinery orders rose in May at the fastest pace in four months in a sign that capital expenditures will stay firm and support the economic recovery as the country rebuilds from a devastating earthquake and tsunami.
The rise in machinery orders, a leading indicator of capital expenditure, supports the Bank of Japan's view that the economy will resume a moderate recovery by autumn as companies restore supply chains and factory output rebounds, suggesting the central bank can afford to keep its easy policy on hold.
But the government maintained its cautious view that machinery orders -- a highly volatile data series -- are only just picking up with some sectors still weak, indicating that any rise in capital spending will be moderate.
Export orders fell in May, suggesting that a softening in global growth, and particularly in Asian economic activity, is clouding the outlook for Japan's export-reliant economy just as it is shaking off supply constraints after the March disaster.
"In addition to reconstruction-related demand, overseas economies, and especially solid demand from Asia, will probably continue to boost corporate capital spending," said Yuichiro Nagai, economist at Barclays Capital in Tokyo.
"But the risks will be whether a slowdown in the global economy accelerates and whether the third extra budget to deal with the quake is compiled by around October or November."
GLOBAL SLOWDOWN A RISK
The 3.0 percent increase in May core machinery orders matched a median market forecast and was the biggest since a 4.0 percent increase in January.
The March disaster so far has not significantly damaged corporate interest in spending, with the BOJ's June tankan survey last week showing big firms plan to increase capital expenditure by 4.2 percent in the current fiscal year that began in April.
"Capital spending is likely to remain one of the bright spots in the economy in the near term, compared to weak components such as consumption, as reconstruction demand and increased public works spending are likely to support," said Takeshi Minami, chief economist at Norinchukin Research Institute.
But there are some reasons to be concerned about the outlook for capital expenditure and production. Japan's Purchasing Managers Index (PMI) for manufacturing slowed slightly in June as new orders stagnated.
PMI indexes for China, Hong Kong and Singapore also showed declines in domestic new orders in June, partly as China takes steps to slow inflation.
The 3.0 percent increase in May machinery orders only offset a 3.3 percent fall in April. It would take a 31.3 percent jump in June for orders to achieve companies' forecast of a 10.4 percent rise in the second quarter, which would be very tough, a government official told reporters on Thursday.
Some auto and machinery manufacturers appeared to be delaying capital spending due to the quake, the official said, suggesting there could be lingering damage from the disaster.
Export orders fell 6.6 percent in May to mark a third straight month of declines, boding ill for Japanese companies that rely heavily on demand from fast-growing Asian economies.
Still, the BOJ is expected to hold off on easing policy further and to revise its assessment of the economy upward at a rate review next week, encouraged by a pickup in factory output and the recovery in business sentiment.
In a sign that wounds inflicted by the March 11 magnitude 9.0 earthquake and deadly tsunami were largely healing, Japan's industrial output jumped in May by the most in nearly 60 years, suggesting a "V-shaped" recovery.
But a political stalemate, as unpopular Prime Minister Naoto Kan clings to office after promising to quit, risks slowing recovery efforts as it could delay budgets to fund disaster relief. The standoff with opposition parties could also delay legislation needed to issue bonds to cover the budget deficit.
(Additional reporting by Stanley White, Editing by Tomasz Janowski)
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