Japan's Jan machinery orders weaken as trade war hits spending plans

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Japan's machinery orders fell in January at the fastest pace in four months due to declining demand in the auto and telecommunications equipment sectors as the U.S.-China trade war dented global demand.

The 5.4 percent decline month-on-month in core machinery orders, a leading indicator of capital expenditure, was more than the median estimate for a 1.7 percent decrease and followed a revised 0.3 percent decline in the previous month. It was also the fastest month-on-month decline since September last year.

Economists say uncertainty over trade policy will discourage Japanese companies from increasing capital expenditure, which will act as a curb on economic growth.

While the United States and China have openly sought to narrow their differences over trade, they are yet to agree to a deal that would unwind punitive tariffs and restore global trade flows.

"It's fair to say the outlook for capital expenditure in Japan is not bright," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

"There is confusion about the status of U.S.-China trade negotiations. This could make Japanese companies more pessimistic, which is a risk for capital expenditure plans in the new fiscal year."

The weak capex also suggests that after more than six years in office, Japanese Prime Minister Shinzo Abe may struggle to keep growth on track.

Highlighting the weakness in the global economy, core machinery orders from overseas fell 18.1 percent in January, Cabinet Office data showed on Wednesday, matching December's decline.

"Core" machinery orders exclude those for ships and from electricity utilities.

Orders from manufacturers fell 1.9 percent month-on-month in January after a revised 4.4 percent decline in December.

Non-manufacturing orders slumped 8.0 percent, also the fastest month-on-month decline in four months. Capex plans have been generally healthy in recent years but the shift in the external trade environment raises the risks companies may now trim their spending plans in the new fiscal year, which would impact broader activity, economists say.

Most Japanese firms commence their fiscal years in April, which is when they are expected to draw up capital expenditure and investment plans.

Another risk for Japan's economy is the government's plan to raise the nationwide sales tax to 10 percent from eight percent in October. The government needs the extra revenue for rising welfare costs, but the tax hike could also weaken consumer spending.

Japan's central bank ends its two-day monetary policy meeting on Friday and is likely to maintain its view the export-reliant economy is expanding moderately but warn of heightening overseas risks, sources say.

Prime Minister Shinzo Abe's administration has been urging Japan Inc to boost pay in an effort to drive the economy and conquer deflation.

But major companies are expected to offer smaller increases this year at annual wage talks on Wednesday amid concerns about the global economy and a looming sales tax hike at home, according to a Reuters survey.

Source(s): Reuters