By Jason Clenfield
July 9 (Bloomberg) -- Orders for Japanese machinery rose at 10 times the pace economists expected in May, as demand increased for equipment used to make semiconductors and steel.
Equipment orders, which signal capital spending in the next three to six months, rose 10.4 percent from April when they climbed 5.5 percent, the Cabinet Office said today in Tokyo. The median estimate of 36 economists surveyed by Bloomberg News was for a 1.1 percent gain.
Canon Inc. this week said it plans to build its first domestic manufacturing plant in 26 years as global demand for digital cameras increases. Large companies plan to increase spending 2.4 percent in the year ending March, the central bank's Tankan survey showed last week.
``The manufacturing sector was strong because demand from emerging economies remains firm, despite slowing exports to the U.S.,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``Capital spending will slow in the coming months, but the pace of decline should be moderate.''
The yen traded at 107.44 at per dollar at 10 a.m. in Tokyo from 107.51 before the report was published. The Topix Machinery Index climbed 1.6 percent, led by Komatsu Ltd., the world's second-biggest maker of earthmovers. Economists' predictions for orders ranged from a 5.2 percent gain to a 4.5 percent drop.
Orders from the steel industry surged 131 percent, and for electrical machinery climbed 34 percent, the Cabinet Office said. Demand for equipment used to make cars fell 3.3 percent.
Reaction to Declines
Today's number was a reaction to declines in February and March, when orders dropped 12.3 percent and 8.3 percent, and a profit squeeze caused by higher oil costs will prompt companies to cut spending in coming months, according to Eishi Yokoyama.
``Given that terms of trade are deteriorating and corporate profits are weakening, the outlook for Japan's capital investment warrants caution,'' said Yokoyama, an economist at AIG Global Investment Corp. in Tokyo. ``We probably need to expect weaker numbers from now on.''
Kawasaki Heavy Industries Ltd. in January canceled a 2006 plan to build a factory for industrial robots that would have cost as much as 10 billion yen ($93 million), company spokesman Katsuhiro Sato said yesterday. Weaker demand in the U.S. for cars and semiconductors means Kawasaki Heavy's existing assembly lines are sufficient to accommodate orders, he said.
Waning Confidence
Confidence at large manufacturers fell to a four-year low in June and companies expect profits to drop this year for the first time since the 2001 recession because of record energy and commodities costs, the Bank of Japan's Tankan survey showed.
Some economists say falling earnings won't discourage Japanese companies from spending.
``You invest in order to maximize profits in the future,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``The fact that your profits are currently low is neither here nor there.''
Canon, whose profit the Nikkei newspaper reported may have fallen as much 18 percent in the six months through June, said this week it will build a factory in Nagasaki, southern Japan. The camera maker, which is turning to Asia and emerging markets as U.S. demand slows, said the plant will employ about 1,000 workers and start running in December 2009.
``In terms of looking where the demand for Japanese goods is going to come from, the continued strength of Asia is key,'' Jessop said. ``I wouldn't neglect the Middle East either, which are the winners from high oil prices.''
Businesses are also spending to replace worn out equipment rather than to meet new demand, according to a Cabinet Office survey taken in the first quarter. After 15 years of putting off repairs and maintenance, replacement spending has become unavoidable, according to Yoshihiko Senoo, head of economic research at the Cabinet Office.
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
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