Japanese Core Machinery Posts Pleasant Surprise

The Japanese economy today received a pleasant surprise when their core machinery orders rose above expectations for the month of July, this is an early sign that a rise in demand was boosting the rate of corporate spending. Data released by the Cabinet office today revealed that the core machinery orders which has proven to be volatile in recent times and has also been termed “the indicator of mid-term capital spending”, grew for the month of July by a seasonally adjusted 4.9% after a higher growth of 8.3% in June. After a median estimate of economists expected a 2.8% fall in orders for July.

For the third quarter of 2016, core machine orders are forecast to have climbed 5.2 percent on quarter and 4.8 percent on year. Also on Monday, the Bank of Japan said that producer prices were down 0.3 percent on month in August. That was shy of forecasts for a decline of 0.1 percent following the flat reading in July. On a yearly basis, producer prices skidded 3.6 percent versus expectations for 3.4 percent after dropping 3.9 percent in the previous month.

The increase in orders comes after business investment slumped in the first half of the year, as business managers exercised caution amid a slowdown in China. Concern about the British decision to leave the European Union had added to the gloomy sentiment.

Prime Minister Shinzo Abe has tried to regain momentum in the economy by postponing a sales tax increase and announcing a major economic stimulus package earlier this month. The Japan Center for Economic Research, a private think tank, predicts business investment will stay mostly flat this calendar year.

The volatility in the Japanese capital expenditure has raised the pressure mounted on the government to boost growth in the Japanese economy. The Bank of Japan which is currently facing a crisis of credibility stemming from the mixed interpretations of comments made by its President Haruhiko Kuroda, is expected to carry out a comprehensive review of monetary policy at their upcoming Board meeting which will hold on September 20-21. The BoJ will also explain the stance of the Japanese economy regarding the 2% inflation target it is yet to achieve especially as all recently released economic data show the economy moving further away from its target.

Policy makers are also set to reveal their strategy on how the BoJ will handle the issue of negative interest rates in the coming weeks. The BoJ’s first move into negative rate territory came in January, the move was frowned on by most market participants. Revised estimates last week showed that the Japanese economy has posted a marginal 0.2% expansion for the second quarter, against previous expectations for a 0.4% fall. Economists also share the opinion that without a strong push, the Japanese economy will report stagnation in the last 2 quarters of 2016.