Japan Machinery Orders Fell 1.3% in March as Factories Sat Idle

By Jason Clenfield

May 15 (Bloomberg) -- Orders for Japanese machinery resumed falling in March, a sign that managers remain wary of upgrading factories and equipment before an economic recovery takes hold.

Bookings, an indicator of capital investment in the next three to six months, fell 1.3 percent from February, when they gained a revised 0.6 percent, the Cabinet Office said today in Tokyo. Economists surveyed predicted a 4.6 percent drop.

Although Japan’s worst recession since World War II probably bottomed last quarter, the collapse in global demand has forced manufacturers to cut production by more than a third from last year’s peak. With factory lines sitting idle and profits falling, companies have little reason to invest in new equipment, spending that accounts for about 16 percent of the world’s second-largest economy.

“The economy is still in bad shape,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “Companies are still reluctant to make new investments.”

The Nikkei 225 Stock Average climbed 1.7 percent 2:38 p.m. in Tokyo. The yen traded at 95.81 versus the dollar from 96.10 before the report.

From a year earlier, orders fell 22.2 percent in March compared with 30.1 percent in February. The Cabinet Office said the “pace of declines has eased,” changing the wording of its assessment from “the orders trend continues to decline.”

Bookings from abroad, which aren’t included in the headline number, jumped 46.4 percent, the third-biggest monthly gain on record. The Cabinet Office doesn’t give any information about the geographic origin of the orders, though an official said China is likely to have been a source of demand.

Record Contraction

Analysts predict a government report next week will show the economy shrank at an annual 16.2 percent pace last quarter, the worst showing since records started in 1955 and the fourth contraction in a row.

Data released in the past month suggest gross domestic product may rise this quarter, albeit building from a low point.

Confidence among merchants and small businesses improved in April. Exports increased in March from a month earlier, and factory production rose for the first time in six months. Bank of Japan Governor Masaaki Shirakawa said this week that the gain in output shows the economy is “leveling out.”

“There’s been some good news, which is encouraging,” Finance Minister Kaoru Yosano said in Tokyo today. “But it’s too early to say” that the nation is on a recovery track, he added.

Low Levels

Even after showing signs of stabilizing, exports remain at little more than half of last year’s levels. Only about half the nation’s productive capacity is being used. That puts pressure on companies to cut costs and delay investments.

“Companies don’t see demand coming back,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. “We’re not going back to the old levels of growth.”

Toyota Motor Corp. estimates it will sell only 7.3 million vehicles this year, less than the 10 million it has the capacity to build. The company, which forecasts its second year of losses, said this week that it will idle three of 11 production lines at one of its domestic engine plants.

Hitachi Ltd., which last year suffered a record 787 billion yen loss, said it will try to wring 500 billion yen worth of cost savings from its operations this year. That will mean consolidation of production lines at its chip-making unit, reduced research spending and wage cuts.

Companies are getting some relief from a decline in raw- material costs, a separate report showed today. Producer prices, the costs businesses pay for energy and raw materials, tumbled 3.8 percent in April from a year earlier, the biggest slide in 22 years, the Bank of Japan said.

“The economy may hit bottom in the first half of this year,” said RBS’s Nishioka. “But any recovery will probably be very slow.”

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