Japan Machinery Orders Drop More Than Expected in Sign Rebound Is Stalling

Japan’s machinery orders fell the most in 10 months in July, as the yen’s gain to a postwar record eroded company profits and discouraged investment.

Factory orders dropped 8.2 percent in July from June, when they increased 7.7 percent, the Cabinet Office said today in Tokyo. Orders, an indicator of capital spending in three to six months, were projected to decline by 4.2 percent, according to the median forecast of 27 economists surveyed by Bloomberg News.

Today’s report adds to concern that a rising yen may derail the nation’s recovery from March’s record earthquake, putting pressure on officials to take action to stem gains in the currency. Finance Minister Jun Azumi, who was sworn in last week, said on Sept. 4 that the government is ready to take decisive action against speculative moves in the yen.

“The rebound may have run its course,” Richard Jerram, chief economist at Bank of Singapore Ltd., who has analyzed Asian economies for two decades, said before the report. The strong yen “is lowering profitability of companies, deterring them from making investments,” he said.

The yen traded at 77.35 per dollar as of 9:58 a.m. in Tokyo, from 77.33 before the indicator was released. Adding to signs of a weakening recovery, the Finance Ministry said in a seperate report today that the nation’s current-account surplus shrank 42 percent in July as exports slid 2.3 percent from a year earlier.

A government report last week showed that capital spending tumbled 7.8 percent in the second quarter, bucking the median forecast in a Bloomberg News survey of economists for a 1 percent gain. The unemployment rate unexpectedly rose for a second month to 4.7 percent in July.

Yen’s Advance

The yen’s advance to a post-World War II high last month came even after authorities intervened on Aug. 4 in the foreign- exchange market for the first time since March. A stronger yen makes Japanese products less competitive abroad and erodes overseas profits when they’re repatriated.

The Group of Seven nations’ finance ministers and central bankers are due to meet in Marseilles, France, this week as global policy makers struggle to sustain an economic rebound from the 2008 recession. Switzerland, which like Japan has had to contend with the appreciation of its currency due to increased demand for save-haven assets, this week pledged to put a ceiling on its exchange rate against the euro.

“We are concerned about persistent one-sided gains in the yen,” Finance Minister Azumi said on Sept. 4. “I will tell the G-7 that a strengthening yen may slow Japan’s economic growth.”

Business Plans

Japan’s largest manufacturers based their business plans for the year ending March 31 on the assumption that the yen will average 82.59 per dollar, according to the Bank of Japan’s quarterly Tankan survey released on July 1.

Denso Corp. (6902), Toyota Motor Corp.’s biggest auto parts supplier, said last month that the strong yen is undermining its recovery from the March 11 earthquake and may prevent the company from raising its full-year profit forecast. Every one yen gain against the dollar cuts Denso’s operating profit by 2.9 billion yen, the company said.

-- Editors: Lily Nonomiya, Ken McCallum

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

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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