Japanese machinery orders fell the most since August 2008, a sign that any rebound in business investment may be too weak to drive an economic recovery that is showing signs of losing momentum.
Orders, an indicator of future capital spending, slid 9.1 percent in May from April, the Cabinet Office said today in Tokyo. It was the first decline in three months, and exceeded the median 3 percent drop in a Bloomberg News survey.
The report prompted Cabinet Office spokesman Keisuke Tsumura to say the outlook is becoming less certain, while Bank of Japan Governor Masaaki Shirakawa said the economy will keep expanding. The remarks echo a divergence between government officials and the central bank earlier this year before Shirakawa and his board expanded a credit program in March.
“Pressure on the BOJ to ease monetary policy further will continue to increase,” said Kenro Kawano, a debt strategist in Tokyo at Credit Suisse Group AG. “The central bank’s policy is heading toward an easing bias.”
The yen fell 0.8 percent against the dollar and 0.9 percent versus the euro, reducing pressure on exporters whose competitiveness has been threatened by gains in the currency. The Nikkei 225 Stock Average rose 2.8 percent, the most in more than a month, after a trade group said U.S. retail sales grew the most in four years. The gauge has lost 15 percent in the past three months.
Separate figures showed a cooling of exports, which have been the main driver of the nation’s rebound from its worst postwar recession. Slower growth in shipments abroad caused the current-account surplus to narrow for the first time in 10 months, falling 8.1 percent to 1.205 trillion yen ($14 billion) in May from a year earlier, the Finance Ministry said.
“The recovery’s no longer adding momentum and we’re beginning to see more downside risks,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. He said the degree of any political pressure on the BOJ depends on the direction of the economy as well as stocks and the yen.
The International Monetary Fund today cut its forecast for Japan’s 2011 economic growth to 1.8 percent from 1.6 percent. The world’s second-largest economy will grow 2.4 percent this year, faster than the 1.9 percent the IMF predicted in April.
“Exports and production are expected to keep increasing,” though at a slower pace, as overseas economies continue to improve, Shirakawa said at a quarterly meeting of the bank’s branch managers in Tokyo. The regional chiefs raised their view of the economy in eight of the country’s nine areas, their Sakura Report showed today.
The BOJ intends to keep a “very accommodative financial environment,” Shirakawa said, adding that global credit markets are showing signs of volatility because of sovereign-debt concerns.
Japan’s central bank has held the benchmark interest rate at 0.1 percent since December 2008. It doubled a credit facility to 20 trillion yen in March and has since unveiled a 3 trillion yen program to encourage lending to businesses and help defeat deflation.
Cabinet Office Parliamentary Secretary Tsumura said the outlook is being clouded by Europe’s debt crisis. “It’s possible that the pace of the recovery will be more gradual, even weaker, than our initial expectations.”
Merchant sentiment declined for a second month in June, a separate Cabinet Office report showed today. Tsumura is a member of Prime Minister Naoto Kan’s Democratic Party of Japan that is seeking to maintain control of the upper house of parliament in elections on July 11.
Businesses have yet to deploy record stockpiles of cash accumulated as the trade revival that began last year spurred profit. Bank lending slid 2.1 percent in June, matching the biggest drop in almost five years, the central bank said today, an indication that firms remain reluctant to borrow.
Companies “are just sitting on their cash,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “They have limited plans of investing in Japan because most corporations do not expect the domestic economy to come back strongly.”
Today’s machinery report contrasts with a Bank of Japan survey last week that showed large companies aim to increase spending by 4.4 percent in the year ending March 2011, the first gain in three years.
Computer-memory chip maker Elpida Memory Inc. is among firms that are planning to spend more as prospects improve. The Tokyo-based company plans to more than double its investment budget to 115 billion yen this fiscal year.
Still, Japan can’t count on continued surges in overseas demand for much longer, according to economist Tatsushi Shikano.
“Overseas economies will probably begin to lose steam at the end of the year,” said Shikano, senior economist at Mitsubishi UFJ Securities Co. in Tokyo. “That means exports and production may lose momentum, leading to a halt in the increases in capital spending.”