Japan Machine Orders Fall 3.9%, Second Monthly Drop

By Jason Clenfield

Sept. 11 (Bloomberg) -- Japanese machinery orders fell for a second month in July, signaling manufacturers expect the global slowdown to crimp demand into next year.

Orders, an indicator of capital spending in the next three to six months, declined 3.9 percent from June, when they slid 2.6 percent, the Cabinet Office said today in Tokyo.

Japan's economy probably shrank last quarter more than initially estimated as business spending fell, the government is expected to report tomorrow. Slowdowns in the U.S. and Europe have taken a toll on Japanese exports, the engine that drove growth over the past six years, while stagnating wages and the worst inflation in a decade have subdued consumer spending.

``Business investment is likely to stay on a downward trend at least through the end of the year,'' said Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp. in Tokyo. ``We need to see an improvement in the U.S. for this to change.''

The yield on Japan's 10-year bond fell 2 basis points to 1.485 percent at 11:36 a.m. in Tokyo. The Topix stock index slid 1.5 percent, and a subindex of machinery makers lost 2 percent.

The median estimate of 35 economists surveyed by Bloomberg News was for a 3.6 percent drop in machinery orders.

From a year earlier, orders decreased 4.7 percent, the first decline in four months, the Cabinet Office said. The value of orders placed from abroad, a figure excluded from the headline number, declined to the lowest level in two years.

Impact of Slowdown

That ``suggests that the slowdown in the global economy is starting to have a material impact on the machinery sector,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Holdings Inc. in Tokyo.

Kubota Corp., the world's biggest maker of mini excavators, said last month it will cut production because of slowing demand from the U.S. and Europe. Tokyo Electron Ltd., Japan's largest maker of semiconductor equipment, lowered its full-year profit forecast by 40 percent last month after weakening demand for personal computers prompted chipmakers to postpone spending plans.

``Companies are very cautious in a recessionary environment and I don't think they're bold enough to anticipate a quick profit recovery,'' said Fujii at Bank of America.

Spending, Profits

Businesses reduced spending on factories and equipment for a fifth quarter in the three months ended June 30, the Finance Ministry said last week. Record costs for oil and raw materials caused profits to decline for the fourth consecutive quarter.

The government will use the capital spending figures to revise second-quarter gross domestic product tomorrow. The economy contracted an annualized 3.1 percent, more than the 2.4 percent reported last month, according to economists surveyed.

Still, economists say the current slowdown is unlikely to be as severe as the last recession, which lasted from December 2000 to January 2002. The economy is more resilient because companies have shed the excess workers, factory lines and debt that contributed to a decade of stagnation in the 1990s.

``In the old days external shocks tended to get amplified,'' said Seiji Shiraishi, chief Japan economist at HSBC Securities Ltd. in Tokyo. ``But this time around, without the three excesses, the downside risks are limited.''

Japan Is Unique

The world's second-largest economy may also benefit more than others from declining oil prices, according to Julian Jessop, who says Japan is unique in having escaped the credit crunch and the housing collapse that's hit the U.S. and Europe. Crude has eased 29 percent since reaching a record in July.

``That's going to relieve a lot of cost pressures,'' said Jessop, chief international economist at Capital Economics Ltd. in London. ``I'm convinced the Japanese economy will be one of the first to recover as the global inflation shock fades.''

Other economists say oil's decline reflects weakening demand and slower growth in the emerging markets that have helped Japanese companies weather the U.S. slowdown. In China, which in July passed the U.S. as Japan's biggest export customer, economic expansion has cooled for four quarters.

``You can't rescue the world economy just with lower oil prices,'' said Martin Schulz, senior economist at a research arm of Fujitsu Ltd., Japan's biggest computer services company. ``Asia has to correct quite a bit and that's an important market for Japan.''

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