Japan Machine Orders Declined Less-Than-Expected 3.9% in June

By Jason Clenfield

Aug. 7 (Bloomberg) -- Orders for Japanese machinery fell less than economists estimated in June, a sign that any recession in the world's second-largest economy may be mild.

Equipment orders, which signal capital spending in the next three to six months, declined 2.6 percent from May, when they climbed 10.4 percent, the Cabinet Office said today in Tokyo. The median estimate of 39 economists surveyed by Bloomberg News was for a 9.9 percent drop.

The government said yesterday that the economy is ``deteriorating,'' acknowledging for the first time that the longest postwar expansion has probably ended. Still, Japan's companies are less vulnerable to a global slowdown than they were in previous recessions because in the past decade they cut debt, closed plants and laid off workers.

``Capital spending is holding up, though uncertainties remain over the slowing U.S. and emerging economies,'' said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. ``Japan's recession will be milder than previous ones.''

The yen traded at 109.42 per dollar as of 12:33 p.m. in Tokyo from 109.50 before the report was published. The Topix machinery index of shares fell 0.8 percent, less than a 1.8 percent decline in the benchmark Topix.

Orders climbed 0.6 percent in the second quarter from the first three months of 2008, beating a March forecast for a 10.3 percent decline. Machinery makers predict orders will drop 3 percent in the current quarter, today's survey showed.

Still Spending

Companies plan to increase capital investment by 4.1 percent in the year ending March, according to a survey released this week by the Tokyo-based Development Bank of Japan. While that's slower than last fiscal year's 7.7 percent, it's better than the 10 percent decline recorded during the 2001 recession.

The debt-to-equity ratio of Nikkei 225 Stock Average companies has dropped an average of 7 percent annually over the past five years, Bloomberg data show. An index indicating excess production capacity at large manufacturers was at zero in the Bank of Japan's July Tankan business survey, down from 33 in March 2002, when the country was emerging from a recession.

``The current technical recession is completely different from previous ones,'' said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. Murashima said Japan's banks have been relatively unscathed by the worldwide credit crunch and exporters are less reliant on customers from the U.S. and Europe, where the global slowdown is most pronounced.

Labor demand is close to a 16-year high, according to the central bank. The jobs-to-applicants ratio was at 0.91 in June, meaning almost every person who wants a job can get one. In 2001, there were two applicants competing for every position.

Profit Squeeze

Still, exports are slowing and soaring material costs have squeezed profits, compelling companies to cut production and hiring. Gross domestic product probably fell at an annual 2.3 percent rate last quarter, the first contraction in a year, economists estimate a report will show on Aug. 13.

``We expect the capital expenditure correction to continue'' as sales and earnings fall, said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs Group Inc. in Tokyo.

A Kyushu-based Toyota Motor Corp. subsidiary that builds sport-utility vehicles fired 800 workers since June because of weakening demand for the vehicles in the U.S. Toyota says it will cut spending on research and development this year for first time since 2001.

Today's report showed equipment orders from abroad fell 3.9 percent in the second quarter, the biggest drop in two years. Companies expect overseas orders to slump 12.1 percent in the three months ending September.

Fukuda's Reshuffle

Prime Minister Yasuo Fukuda last week replaced his economic ministers in a bid to boost his popularity, which has plummeted amid rising food and gas prices and a 13 percent slide in the Nikkei 225 this year.

Finance Minister Bunmei Ibuki said this week Japan is at risk of falling into stagflation, a combination of slowing growth and spiraling prices. Economic and Fiscal Policy Minister Kaoru Yosano said on Aug. 4 that he plans to announce measures this month to help consumers and companies cope with rising energy costs.

``Whether we're in a technical recession or not isn't important to investors,'' said Nikko Citigroup's Murashima. ``The more important question is how deep and how protracted. I think this will be short and shallow.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net