A man works at a construction site in Tokyo. Japan’s core machinery orders, a leading indicator of capital expenditure, fell 5.7% in August versus the median estimate for a 3.2% increase.

Reuters/Tokyo

Japan’s machinery orders unexpectedly fell in August in a worrying indication that capital expenditure is weaker than many policymakers expected, which could increase the chances of new fiscal and monetary stimulus.
Core machinery orders, a leading indicator of capital expenditure, fell 5.7% in August versus the median estimate for a 3.2% increase, and followed a 3.6% decline in the previous month.
The decline in machinery orders suggests capital expenditure is not as strong as indicated in last week’s Bank of Japan tankan survey and could undermine Governor Haruhiko Kuroda’s optimism.
The September tankan survey found that big firms plan to raise capital expenditure by 10.9% in the fiscal year that started April 1, compared with their previous plan to boost capital spending by 9.3%. Kuroda citied these figures as one reason inflation will pick up after the central bank left policy on hold on Wednesday, but the slide in machinery orders undermines this argument.
The Cabinet Office lowered its assessment of machinery orders to say they are stalling.   Machinery orders fell 3.2% in August from July led by down by electronics, steel and car manufacturers, Cabinet Office data showed.
Orders from non-manufacturers’ fell 6.1%, due to declines in orders from financial services and shipping. An unexpected decline in August industrial production led some economists to say the economy may have contracted in July-September, which would put it in a technical recession after a contraction in April-June.
Machinery orders are very volatile, so it is premature to say whether or not the chance of a recession has increased, but the outlook is still weak due to worries about overseas demand, economists say.
Reflecting other domestic demand concerns, sentiment in the services sector worsened for the second straight month in September as retailers and restaurants turned more pessimistic, a separate Cabinet Office survey showed.
The survey’s index, which measures responses from service employees such as taxi drivers, hotel workers and retail staff, fell to 47.5 in September from 49.3 in the previous month. A reading below 50 means pessimists outnumber optimists.
Some economists expect the BoJ to ease policy on October 30, when it is expected to cut its long-term economic and price growth forecasts.
“Our house view is the BoJ will ease policy in January, but the chances have risen that the BoJ will move later this month. There will also be talk about a new fiscal stimulus package,” said Mizuho Research Institute senior economist Hidenobu Tokuda.

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