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Deflation worry as Japanese machinery orders fall 11% in a month to 1980s level

January 15, 2010 | "The Times"

Japanese machinery orders — a key driver of Asia’s largest economy — have crumpled at a shocking pace, sliding to levels last seen in the late 1980s.

A Cabinet Office report of the decline, which casts yet more shadows over a fragile Japanese economic recovery, was accompanied by an even grimmer survey from the Bank of Japan suggesting that the scourge of price deflation may now be firmly lodged in the national psyche.

Machinery orders in November were 11.3 per cent lower than in October and hit a 23-year low. The figures were easily worse than the consensus forecast of 25 economists and led many to suspect that the Government’s efforts to stimulate the economy may be fast diminishing as a positive force.

Kohei Okazaki, a Nomura economist, said that the weak numbers “reflect the fading impact of increased spending on public works as part of the economic stimulus measures and machinery makers now appear to be relying to an even greater extent on orders from overseas”.

Some argued that the slide marked a turning point in Japanese corporate attitudes. Machinery order numbers are often taken as a guide to future capital spending plans. The slump in orders could imply that Japanese companies are to some extent giving up on prospects for a recovery led by domestic demand and are now focusing on building capacity overseas to tap growth into more vigorous economies.

One senior Cabinet Office official said: “The export-led economic recovery is struggling to spread over to domestic private demand.”

However, some analysts cautioned against reliance on overseas orders. Naomi Klein, a strategist for the Bank of Tokyo Mitsubishi UFJ, said that yesterday’s figures were “a warning against leaning too heavily on external demand at the expense of addressing long-standing problems with the productivity and efficiency of Japan’s obsolete domestic institutions, both public and private”.

Domestic demand in Japan has also been hurt by a “bedding-in” of deflationary expectations. The Bank of Japan’s quarterly survey of consumer expectations found a record proportion of the public now expecting prices to fall — a mindset that has historically proved very difficult for the Japanese Government to dislodge.

The central bank also issued data showing that wholesale prices fell by a record margin last year. Analysts said that this was evidence that deflationary pressures are now anchored throughout the economy. Hiroshi Shiraishi, an economist for BNP Paribas in Tokyo, said: “We are starting to see clearly that Japan’s economic recovery is not going to be a straight line. It is probably going to be bumpy and quite anaemic. We are also looking at an economy that is going to suffer from price deflation for some time.”

Julian Jessop, of Capital Economics, said that it was not time to tear up 2010 economic forecasts for Japan. “For a start, although orders appear to have resumed their downward trend, even the core data are very erratic from month to month.”

The worst of the damage to machinery orders came in the non-manufacturing sector, the area most closely reflecting domestic demand. Demand from companies making cars, construction machinery and other export items stayed reasonably robust, aided by demand from China and other economies in which stimulus measures have built resilience.

However, companies producing equipment for the mobile phone, food production and IT sectors are now thought to be investing only a bare minimum in domestic capacity.

Leo Lewis, Asia Business Correspondent

Company: Japan

Full company nameJapan
Country of riskJapan
Country of registrationJapan


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