Japan Machinery Orders Fall by Record 16.2% as Exports Collapse

By Jason Clenfield

Jan. 15 (Bloomberg) -- Japanese machinery orders fell by a record 16.2 percent in November, twice as much as economists estimated, as businesses cut spending amid a deepening global recession.

The drop in orders, an indicator of capital spending in the next three to six months, was the biggest decline since the current survey began in 1987, the Cabinet Office said today in Tokyo. Economists surveyed predicted an 8 percent decline.

The Nikkei 225 Stock Average fell 4 percent on concern the report signals further cutbacks in spending, after companies from Toyota Motor Corp. to Sony Corp. reduced production and fired workers. The Bank of Japan has little room to spur the economy after cutting interest rates close to zero, and political wrangling is holding up Prime Minister Taro Aso’s measures aimed at spurring growth.

“Japan is heading into a deep recession,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “The report suggests the pace of declines in capital spending will accelerate in coming months.”

Fanuc Ltd., the world’s largest industrial robot maker, led declines in the Nikkei, which slid to 8,102.77 at the morning close. The yen traded at 88.93 per dollar at 11:50 a.m. in Tokyo from 89.13 before the report was published.

The world’s second-largest economy may have shrunk as much as 12 percent on an annualized basis last quarter, Barclays Capital predicts, which would be the steepest decline since 1974. Exports plunged 26.7 percent in November, the sharpest decline since comparable data were made available in 1980, and factory output dropped 8.1 percent, the most in more than a half century.

Mounting Evidence

Mounting evidence of a weakening economy prompted the Bank of Japan last month to cut interest rates to 0.1 percent from 0.3 percent. Aso has yet to get approval from the opposition-led upper house to spend 10 trillion yen ($112 billion) on financial aid for households and companies.

Weak domestic demand and falling oil prices may herald a return to the deflation that plagued Japan for almost a decade until 2005. Producer prices rose 1.1 percent in December, the slowest pace since May 2004, a central bank report today showed. Wages tumbled 1.9 percent in November and consumers have pared spending for nine consecutive months.

“Deflation will probably re-emerge as a problem for the Japanese economy in mid-2009,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “It will remain difficult to forecast when the global economy will pick up and start to lift prices.”

Orders Tumble

Tokyo Electron Ltd., Japan’s largest maker of semiconductor equipment, last week said orders tumbled 81 percent as chipmakers postponed spending plans. Orders for display- production machinery and solar-panel equipment plummeted to 500 million yen from 57.3 billion yen, the company said.

“Capital expenditure is likely to suffer a heavy blow,” said Takuji Okubo, a senior economist at Merrill Lynch & Co. in Tokyo. “With the collapse in exports and industrial production, companies are likely to respond by postponing and cutting investment.”

The yen’s 18 percent gain against the dollar since September is eroding exporters’ profits, adding to their woes.

Toyota said last week it will close all of its domestic factories for 11 days. Japan’s biggest carmaker is expecting its first operating loss in seven decades for the year ending March.

Sony, which last month said it will have to shut factories and fire 16,000 workers, may also have a loss for the year, the Nikkei newspaper reported.

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