November 2012 Machinery Orders

◆Machinery orders (Cabinet Office [CAO]; private sector excl. those for shipbuilding and from electric utilities; leading indicator of domestic capex) posted the second monthly gain in a row in November (up 3.9% m/m), surpassing consensus expectations (up 0.3%). On a three-month moving average basis, orders saw the first gain in three months, signaling the underlying downtrend is turning around.

◆By demand source, manufacturing orders increased for the first time in two months (up 3.9% m/m). Among manufacturing orders, a substantial gain for those from the pulp & paper/paper product industry likely reflected a one-time factor, which warrants some latitude. However, advances were seen for those from a wide range of industries, such as chemicals, iron & steel, general machinery, electrical machinery, and autos/auto parts. Non-manufacturing orders (private sector excl. those for shipbuilding and from electric utilities) made the fourth consecutive monthly gain (up 6.2%). Among non-manufacturing orders, substantial gains were seen for those from the agriculture/forestry/fishery and financial/insurance industries, driving overall non-manufacturing orders. At the same time, those from the information services and real estate industries remained firm, both posting the third consecutive monthly gain in a row.

◆The CAO projects that machinery orders will increase 5.0% q/q in Oct-Dec 2012, the first gain in three quarters. To meet the projection, they have to increase 11.5% m/m in December, not an easy hurdle. However, they would see positive q/q growth in Oct-Dec even if they decline 3.1% m/m in December, making it very likely that they will turn around to positive growth. Given the tendency that machinery orders lead GDP-based capex by around three months, capex will likely begin to increase in Jan-Mar 2013. At the same time, other factors also suggest capex is likely to recover gradually. Such tailwind factors include the shift to a weaker yen of late and public support of private investment stipulated in a policy measure approved on 11 January by the Cabinet.