Japan's machinery orders rise sharply, may ease concerns about domestic demand

Japan's key gauge of capital spending jumped the most in a year in February, rebounding sharply from the prior month's decline in a welcome sign for domestic demand even as authorities worry about a weakening yen and its impact on the cost of living. Core machinery orders rose 7.7 per cent in February from the previous month, blowing past a 0.8 per cent increase expected by economists in a Reuters poll, Cabinet Office data showed on Monday.

It was the fastest growth in core orders since January 2023 and more than recouped a 1.7 per cent fall in the previous month. "Machinery orders have hit the bottom," said Takeshi Minami, chief economist at Norinchukin Research Institute. "Japanese firms are making higher profits and hiking wages lately so it's natural for them to raise investment as well," Minami added. "Still, risks remain due to uncertainty over the global economy. For example, the Middle East crisis may trigger a spike in crude oil prices which would discourage Japanese firms from boosting capex."

Iran launched explosive drones and fired missiles at Israel late on Saturday in its first direct attack on Israeli territory, a retaliatory strike that raised the threat of a wider regional conflict. Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, declined 1.8 per cent in February but that was again shallower than a 6.0 per cent drop seen by economists.

Brisk capital spending should ease concerns about weak domestic demand as government and central bank policymakers try to stoke a virtuous growth cycle led by durable consumption and solid wages. Japanese firms have come up with strong plans for investment in plants and equipment in recent years, but uncertainty over the economic outlook has caused delays in implementing those plans. This time around, however, solid wage hikes offered by major companies should encourage domestic consumption and in turn boost business confidence around capital investment plans, analysts say.

The core orders data was released amid a backdrop of concerns around persistent weakness in the yen. The Japanese currency slumped to 34-year lows against the dollar beyond 153 yen last week, which could boost import prices and add to already stiff cost-of-living pressures. Last month, the Bank of Japan ended negative interest rates in a landmark shift away from its decade-long super-easy accommodative policy after major firms offered big pay raise at annual wage talks in mid-March. But monetary conditions are still relatively easy with the BOJ flagging a cautious track for further policy tightening for the rest of this year. Capital spending is among factors that policymakers will consider as they look to decisively shift Japan onto the path of monetary policy normalisation.