Japan’s Machinery Orders Slump 9.1%, Most Since 2008

July 8 (Bloomberg) -- Japanese machinery orders fell the most since August 2008, a sign that any rebound in business investment may be too weak to drive the economic recovery.

Orders, an indicator of future capital spending, slid 9.1 percent from April, the Cabinet Office said today in Tokyo. It was the first decline in three months, and exceeded the median 3 percent drop in a Bloomberg News survey of 24 economists.

The report prompted Cabinet Office spokesman Keisuke Tsumura to say the economic outlook is becoming less certain, while Bank of Japan Governor Masaaki Shirakawa maintained his view that the economy will keep expanding. Separate figures showed a cooling of exports, which have been the main driver of the nation’s rebound from its worst postwar recession.

“Pressure on the BOJ to ease monetary policy further will continue to increase,” said Kenro Kawano, a debt strategist in Tokyo at Credit Suisse Group AG. “The central bank’s policy is heading toward an easing bias.”

The yen traded at 87.97 per dollar at 10:17 a.m. in Tokyo from 87.83 before the report. Japan’s currency has gained 10 percent in the past three months, threatening to erode exporters’ profit earned abroad. The Nikkei 225 Stock Average climbed 2.7 percent after a trade group said U.S. retail sales grew at the fastest pace in four years.

The drop in machine orders was the biggest since they fell 10.2 percent in August 2008, revised figures showed today. The current-account surplus narrowed 8.1 percent to 1.205 trillion yen ($14 billion) in May from a year earlier as export growth slowed, the Finance Ministry said.

Recovery Trend

“Exports and production are expected to keep increasing,” though at a slower pace, as overseas economies continue to improve, Shirakawa said at a quarterly meeting of the bank’s branch managers in Tokyo today. “Domestic private demand will likely keep improving and the Japanese economy is likely to stay on a recovery trend.”

Shirakawa repeated that the central bank intends to keep a “very accommodative financial environment.” Japan’s central bank has held the benchmark interest rate at 0.1 percent since cutting it December 2008.

As the global recovery helps companies including Elpida Memory Inc. return to profit, businesses have accumulated record stockpiles of cash. A more sustainable recovery depends on them deploying that money as the expansion shows signs of losing steam.

Hoarding Cash

Companies “are just sitting on their cash,” Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, said before the report. “They have limited plans of investing in Japan because most corporations do not expect the domestic economy to come back strongly.”

Businesses are also holding back on hiring staff. The unemployment rate climbed to a five-month high of 5.2 percent in May while wages dropped, reports showed last week.

Even so, Prime Minister Naoto Kan’s Cabinet raised its view of the economy last month amid signs of a stabilization in capital spending. “The foundation for a self-sustaining recovery is being laid,” the government said in the assessment.

Japanese computer-memory chip maker Elpida is among firms that are planning on spending more as business prospects improve. The Tokyo-based company will boost its investment budget to 115 billion yen ($1.3 billion) this fiscal year from 43.8 billion yen in the year ended March.

Large businesses aim to increase spending by 4.4 percent in the year ending March 2011, the first gain in three years, according to the Bank of Japan’s Tankan survey released last week. Manufacturers expect their profits to more than double in the same period, the Tankan showed.

Japan can’t count on continued surges in overseas demand for much longer, according to economist Tatsushi Shikano.

“Overseas economies will probably begin to lose steam at the end of the year,” said Shikano, senior economist at Mitsubishi UFJ Securities Co. in Tokyo. “That means exports and production may lose momentum, leading to a halt in the increases in capital spending.”