Japan Machinery Orders Decline as Companies Cut Costs

By Keiko Ujikane and Tatsuo Ito

Dec. 10 (Bloomberg) -- Orders for Japanese machinery fell in October, adding to signs the nation’s rebound from its deepest postwar recession isn’t strong enough to encourage companies to spend on plant and equipment.

Orders, an indicator of business investment in three to six months, declined 4.5 percent from September, when they increased 10.5 percent, the Cabinet Office said today in Tokyo. The median estimate of 27 economists surveyed by Bloomberg was for a 4.4 percent drop.

Companies including Kyocera Corp. are cutting costs to limit losses, and have little incentive to add plant and equipment with more than one third of the country’s factory capacity sitting idle. A government report yesterday showed growth last quarter was a third of the pace initially reported as businesses slashed spending.

“We do not expect a full-scale capex recovery anytime soon given uncertainties surrounding the corporate earnings picture,” said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs Group Inc. “Exports will remain the key economic driver in 2010-11 amid continued weakness in domestic demand.”

The yen traded at 88.26 per dollar at 10:40 a.m. in Tokyo from 88.03 before the report was published. The Nikkei 225 Stock Average rose 0.1 percent.

Today’s report suggests Japanese companies are concerned about the sustainability of global demand once more than $2 trillion in government stimulus wears off.

Stocks Fall

Japanese stocks fell yesterday after a report showed gross domestic product growth slowed last quarter and a Dubai developer posted a $3.65 billion loss, fueling concern the recovery in the global financial system would stall. The yen, which climbed to a 14-year high of 84.83 per dollar on Nov. 27, has gained more than 4 percent in the past three months. An advance in the currency erodes the value of profits exporters earn overseas.

“Factory orders will stay at a low level because corporate sentiment isn’t rising,” said Yasuhiro Onakado, chief economist at Daiwa SB Investments Ltd. in Tokyo. “The stronger yen and the Dubai shock have increased uncertainties about the future, so companies can’t help but be cautious about spending.”

Manufacturer orders rose 25.4 percent in October led by a large request for chemical equipment, the Cabinet Office said. Orders by non-manufacturers fell 17.3 percent, the report said.

Combat Deflation

The Japanese government unveiled a 7.2 trillion yen ($81 billion) economic stimulus package this week to combat deflation and the rising yen. The plan came a week after the Bank of Japan released a 10 trillion yen credit program to support the economy.

Some companies are trying to protect earnings by cost reductions from cutting jobs and slashing investment in plant and equipment.

Kyocera plans to close a mobile phone factory in Tianjin, China, and consolidate production in Malaysia to help return the business to profit, the Nikkei newspaper reported last month. The Kyoto-based company has been cutting production amid struggling sales in North America, the newspaper said.

Sega Toys Co. said on Dec. 1 that it plans to eliminate 35 jobs and to save about 300 million yen from the measure.

Increase Outlays

Some economists say Japanese companies may become confident enough to increase outlays as their earnings recover.

Last quarter “should still mark the bottom in the investment cycle,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London, citing improvements in areas including capacity use and profits. “The weakness last quarter may simply reflect the long lags between projects being put on hold at the height of the financial crisis and this showing up in the actual data.”

The Cabinet Office forecast last month orders will increase 1 percent in the three months ending Dec. 31, which would be the first advance in seven quarters.

Demand from Asia, especially China, is helping Japanese exports and production. Exports fell at the slowest pace in a year in October and industrial output increased for an eighth month. China’s economy, Japan’s biggest overseas market, grew 8.9 percent in the third quarter, the fastest expansion in a year, spurring demand for Japanese cars and electronics.

“On the whole, machinery orders are showing signs of bottoming,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “Exports are looking strong, so Japan will probably be able to avoid a double-dip recession.”

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Tatsuo Ito in Tokyo at tito@bloomberg.net.