Japan's Machinery Orders Climb More-Than-Estimated 4%

Japanese machinery orders rose more than economists estimated, signaling companies are preparing to spend again as the economy recovers and earnings rebound.

Orders, an indicator of business investment in three to six months, climbed 4 percent in April from March, a second straight increase, the Cabinet Office said today in Tokyo. The median forecast of 27 economists surveyed by Bloomberg News was for a 1.7 percent gain.

Higher spending at home would broaden a recovery that’s been driven by exports and hampered by deflation. Hitachi Ltd. and Tokyo Electron Ltd. are among businesses that are benefiting from renewed global demand, prompting them to forecast better earnings and invest in plant and equipment.

“In the near term, we can continue to expect growth from economies abroad,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “That means companies will continue to step up their investments.”

The Cabinet Office upgraded its assessment of machine orders for a second consecutive month, saying they are “showing signs of picking up,” after last month noting they “have stopped falling.” From a year earlier, orders rose 9.4 percent, the biggest increase in 22 months.

While exports have been driving Japan’s growth, investors are concerned that the European sovereign debt crisis will undermine demand from abroad, particularly as the yen climbs.

Stocks, Yen

The benchmark Topix stock index slid 0.6 percent at 10:55 a.m. in Tokyo, and has lost 15 percent from this year’s peak on April 15. The yen traded at 91.44 against the dollar from 91.36 before the report. It was 109.31 per euro, after touching 108.08 earlier this week, the highest since November 2001.

Prime Minister Naoto Kan said after taking office yesterday that a weak yen is “generally said to be” positive for the economy. Finance Minister Yoshihiko Noda, also appointed yesterday, told reporters that “disorderly” currency movements can hurt growth.

Japanese companies are tapping demand from abroad, particularly the rest of Asia.

Hitachi said last week that it plans capital spending of 1 trillion yen ($11 billion) over three years and to invest 600 billion yen on research and development. The company forecasts its first annual profit in five years on cost cuts and rising sales of construction equipment and electronic parts.

Profit Rebound

Tokyo Electron, the world’s second-largest maker of equipment used to manufacture semiconductors, last month forecast a return to profit this fiscal year because of a rebound in demand for chips. The company plans to more than double investment to 35 billion yen.

“Capital spending is moving out of the trough as a result of improving corporate profits,” said Chiwoong Lee, senior economist at Goldman Sachs Group Inc. in Tokyo. “We see continuing improvement centered on manufacturing.”

Still, the rebound has been slow to spread to consumers. The unemployment rate rose to a four-month high of 5.1 percent in April and household spending declined. Merchant sentiment fell for the first time in six months in May, the Cabinet Office said yesterday.

The government may revise down first-quarter economic growth to an annual rate of 4.2 percent from its initial estimate of 4.9 percent in a report tomorrow, according to the median estimate of 18 economists surveyed by Bloomberg News.

Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said in Singapore today.

“The worst is over for capital spending and it is on a gradual recovery trend” as earnings rebound, said Mitsumaru Kumagai, a senior economist at Daiwa Institute of Research in Tokyo. “But companies are cautious about the economic outlook as there are concerns over the global recovery.”

Kumagai said businesses will limit investment to replacing old assets rather than expanding production capacity.

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

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