Japanese Machinery Orders Rise 0.5% From Record Low

By Jason Clenfield and Tatsuo Ito

Oct. 9 (Bloomberg) -- Japanese machinery orders rose less than estimated in August, barely rebounding from a record low as depressed capital spending by companies inhibits the economy’s recovery from its worst postwar recession.

Orders, an indicator of business investment in three to six months, climbed 0.5 percent from July, when they fell 9.3 percent, the Cabinet Office said today in Tokyo. Bookings in July dropped to the lowest level since the government began the survey in 1987. Economists forecast a 2.1 percent gain.

While emergency spending by governments worldwide has revived demand for Japanese exports, manufacturers like Toshiba Corp. and Toyota Motor Corp. are still closing plants and slashing costs to return to profit. Firms surveyed last month by the Bank of Japan said they plan to cut investment at a record pace even amid signs demand from abroad is improving.

“These numbers are still weak; they don’t suggest that capital spending is starting to bottom out,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Companies still have too much capacity, and the economic recovery is likely to be slow.”

The yen traded at 88.96 per dollar at 10:38 a.m. in Tokyo from 88.65 before the report. The currency climbed to an eight- month high of 88.01 this week, threatening to erode exporters’ repatriated profits. The Nikkei 225 Stock Average rose 1.1 percent, led by trading companies as commodity prices gained.

Machinery orders slid 26.5 percent from a year earlier, today’s report showed.

Tankan Survey

The central bank’s Tankan survey of business sentiment released last week showed large firms plan to cut capital spending by 10.8 percent this year. The reduction plan for September was the deepest pullback in at least 26 years and it was also worse than estimates made by companies three months ago as the nation was emerging from recession.

“Very simply, that shows that companies are not getting more optimistic,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “Demand hasn’t come back on a broad basis and the inventory rebuild that’s driven exports until now has just about run its course.”

Toyota, which has benefited from government programs to encourage spending on energy-efficient cars, last month announced it will hire 1,600 temporary workers in Japan to meet increased demand for its Prius hybrid. Even after raising its production targets, Toyota estimates a third of its factory capacity will go unused this year. The company in August reiterated its plan to cut capital spending by 36 percent.

Growth Driver

Business investment accounted for about 15 percent of last year’s gross domestic product and capital spending was a key driver of growth during the nation’s longest postwar expansion in 2002-2007.

Nevertheless, there are also signs that the economy is improving. Factory output rose for a sixth month in August; overseas shipments increased 6.1 percent in volume terms; and sentiment among both businesses and consumers is improving.

“There’s no question that things are getting better,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “But with this kind of excess capacity, there’s little hope for a strong recovery.”

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Tatsuo Ito in Tokyo at tito@bloomberg.net.