Japan Machine Orders Fall, Worst Streak Since 2001

By Jason Clenfield

Oct. 9 (Bloomberg) -- Orders for Japanese machinery fell for a third month in August, marking the longest losing streak since the country's last recession in 2001.

Equipment orders, an indicator of capital spending in the next three to six months, declined 14.5 percent from July, the steepest drop in two years, the Cabinet Office said today in Tokyo. The result was five times worse than the 2.8 percent median estimate of 33 economists surveyed by Bloomberg News.

The Nikkei 225 Stock Index plunged 9.4 percent yesterday, the steepest decline in two decades, and has lost 28 percent since August as the global financial crisis threatens exports for Japan's biggest manufacturers. Profit at Toyota Motor Corp. and Hitachi Construction Machinery Co. is likely to fall this fiscal year, the Nikkei newspaper reported.

``The export outlook is really very bleak, to both the U.S., and parts of Europe and increasingly to China,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``It's hard to see how it will avoid getting quite a bit worse over the next six to nine months.''

The government downgraded its assessment of machinery orders for the first time in five months, describing them as ``falling'' after previously saying they were ``showing some weakness.'' The Cabinet Office hasn't used the language since April 2002. From a year earlier, orders declined 13 percent, the fastest pace since June 2007.

Joint Rate Cut


The Nikkei rose 1.1 percent as of 9:30 a.m. in Tokyo, after the U.S. Federal Reserve, European Central Bank and four other central banks cut interest rates in an unprecedented coordinated effort to ease the economic effects of financial crisis.

The yen weakened to 100.24 per dollar from 99.75 before the report was published. Japan's currency has gained 5.8 percent this month, eroding repatriated profits for exporters and making their products more expensive abroad.

The steepness of today's drop meant machinery orders are almost certain to fall in the third quarter. That would be the first quarterly decline in five years.

``Capital spending is very weak and it will get weaker,'' said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. ``With their stocks plunging and overseas demand falling off sharply, companies want to save money.''

Toyota, Hitachi Construction

Toyota, Japan's biggest company, may report a 40 percent drop in operating profit in the year ending March 31, the Nikkei said. The carmaker's U.S. sales slid 32 percent in September from a year earlier.

Hitachi Construction's profit may drop for the first time in seven years as growth in Russia, India and other emerging markets slows, the Nikkei reported. The company will probably report a 6 percent decline in earnings for the half year ended Sept. 30, because of slower sales in Europe, the newspaper said.

``The best indicator for Asian companies right now is Europe,'' said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. Companies ``have been thinking, `Okay the U.S. is tanking, but we still have Europe.' And now they're seeing that with no time lag -- in an instant -- Europe is heading towards recession.''

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each reduced their benchmark rates by half a percentage point yesterday. The Bank of Japan supported the action though refrained from joining in, saying at 0.5 percent its key rate is already ``very low.''

Bank of Japan Governor Masaaki Shirakawa said this week that rising uncertainty in the credit markets makes it difficult to predict when growth is likely to resume. Japan's economy shrank at an annual 3 percent pace in the second quarter, the sharpest contraction in seven years.

Morgan Stanley and Goldman Sachs Group Inc. this week cut their forecasts for Japan's growth, citing weaker demand from abroad. Goldman Sachs said the world's second-largest economy will expand 0.5 percent in 2009, slower than the 1.3 percent previously predicted.

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