Japan Machine Orders Gain as Export-Led Rebound Eases Producer-Price Slump

Japanese machinery orders advanced for the first time in three months and producer prices fell the least in more than a year, reflecting a sustained recovery in an economy struggling to end deflation.

Orders, an indicator of business investment in three to six months, climbed 5.4 percent in March from February, the Cabinet Office said today in Tokyo. The costs that companies pay for energy and unfinished goods fell 0.2 percent in April from a year earlier, the Bank of Japan said.

Overseas demand is bolstering the earnings of exporters from Nissan Motor Co. to Toshiba Corp., and has prompted them to invest in plant and equipment at home. The dependence on foreign business may also be a vulnerability: Japan’s stocks tumbled today on concern that Europe’s sovereign-debt crisis will impair the global economic rebound.

“We had forecast a recovery in business investment in the second half of this fiscal year, but it will probably come in the first,” said Susumu Kato, chief economist at Credit Agricole CIB and CLSA in Tokyo. “Japan’s economy may continue to have comfortable growth in the coming months, even though the pace may slow a bit.”

Japan’s Nikkei 225 Stock Average lost 2 percent in morning trading, to 10,255.01. With European efforts to cut fiscal deficits threatening to damp growth, the euro tumbled 1.3 percent to 113.04 yen as of 11:54 a.m. in Tokyo. A stronger yen may make Japan’s exports more expensive. The yen also rose 0.4 percent to 92.06 per dollar.

Economists’ Forecasts

The increase in machinery orders was smaller than the 6.3 percent median estimate of 22 economists surveyed by Bloomberg News. Analysts forecast producer prices would slide 0.3 percent.

The Cabinet Office raised its view of orders, saying they “have stopped falling.” From a year earlier, they rose 1.2 percent, the first increase in 21 months.

Today’s figures come three days before a report that may show gross domestic product growth accelerated last quarter. The world’s second-largest economy probably expanded at an annual pace of 5.5 percent in the three months through March, after a 3.8 percent gain the previous quarter, according to the median estimate of 21 economists in a Bloomberg News survey.

Nissan, Japan’s third-largest automaker, forecast profit will more than triple this fiscal year as auto demand recovers in North America and sales grow in China. Capital spending as a percentage of sales will rise to 4.4 percent this fiscal year from 3.6 percent last year, the company said on May 12.

Toshiba’s Profit

Toshiba, Japan’s biggest memory-chip maker, aims to quadruple profit in three years as it raises spending and looks to faster-growing emerging markets and environment-friendly businesses to boost sales. Toshiba will spend 1.3 trillion yen ($14 billion) on plant and equipment over the three years to March 2013, it said last week.

Orders for machinery rose 2.9 percent in the January-to- March period, today’s report showed, and the Cabinet Office forecasts they will gain a further 1.6 percent this quarter.

“We are seeing signs of a self-sustained recovery for machine orders, mainly in the manufacturing sector,” said Keisuke Tsumura, parliamentary secretary at the Cabinet Office.

The risks of slowdowns in Europe and China, which is seeking to cool its expansion and hold down inflation, cloud the outlook for Japan’s capital spending, according to economist Naoki Tsuchiyama.

Overseas Demand

Authorities in China, Japan’s biggest overseas market, are trying to contain consumer prices and a property boom without derailing the rebound. The debt crisis may also damp demand from Europe, said Tsuchiyama, a market economist at Mizuho Securities Co. in Tokyo.

“Japan’s export-led recovery may slow this fiscal year,” Tsuchiyama said. “It’s difficult to foresee demand in Europe growing as the sovereign problem may be prolonged. Demand in the emerging nations also may slow given speculation monetary tightening will continue there.”

Companies also face a potential profit squeeze from rising costs. The moderation of declines in producer prices last month was the result of higher costs of imported raw materials that businesses may struggle to shift to customers.

“Producer prices will probably turn positive within a few months, but companies will continue to have difficulty passing on costs,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “Their profit margins are being squeezed.”

Nippon Steel Corp., Japan’s largest steelmaker, last month refrained from forecasting this fiscal year’s profit because it’s still negotiating prices with suppliers and clients.

Masahiro Higo, a Bank of Japan official, said today that producer prices may resume rising as early as this month, thanks to the surge in commodity costs, while processed materials keep getting cheaper.

“Prices of final goods are still declining,” said Kato at Credit Agricole. “Deflation hasn’t been wiped out yet.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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