Japan's Core Machine Orders Unexpectedly Surge in November

(Bloomberg) -- Japan’s core machine orders unexpectedly rose in November, driven by demand from the nation’s non-manufacturing sector, the latest sign of strengthening capital investment.

Highlights of machine orders
  • Japan’s core machine orders rose 5.7 percent from a month earlier, beating estimates of a 1.4 percent fall, according to figures released by the Cabinet Office on Wednesday.
  • From a year earlier, orders rose 4.1 percent, beating estimates of a 1 percent decline.
  • Orders from the non-manufacturing sector rose 9.8 percent from the previous month, while orders from the manufacturing sector declined 0.2 percent.
  • Within non-manufacturing, transport and postal services and the wholesale, retail and construction sectors boosted the numbers the most. 

Key Takeaways

A recovery in goods exports has driven corporate profits and business investment, and the latest core machine orders suggest that non-manufacturing firms are also becoming more confident about the business outlook. Core machine orders are an indicator of future capital spending, and exclude volatile orders for ships and orders from electrical power companies.

Bloomberg Economics

Surprising strength in Japan’s November machine orders points to a clear increase in the fourth quarter -- probably surpassing corporate projections, Yuki Masujima of Bloomberg Economics wrote. Domestic demand, particularly in the non-manufacturing sector, drove the gains. 

Looking forward, a recent surge in the yen adds uncertainty to the outlook. A less competitive currency could crimp investment appetite of Japanese exporters -- tempering the pace of increase in domestic capital expenditure.

Economist Takeaways

  • “The overall numbers are definitely strong, with two months of gains,” said Yasutoshi Nagai, chief economist at Daiwa Securities Co. “With external demand increasing, it looks like capital spending in Japan is getting firmer. The question is whether domestic demand will continue to be able to grow.”
  • The latest machine orders were at the upper end of the expected range, and another month of high growth may be reason to upgrade the view of Japan’s capital expenditure, Nagai said.

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