December 2015 Machinery Orders

◆According to statistics for machinery orders in December 2015, the leading indicator for domestic capex, private sector demand (excluding shipbuilding and electrical power), orders grew for the first time in two months at +4.2% m/m, pretty much in tune with market consensus at +4.4%. Moreover, the Oct-Dec period’s performance in comparison to the previous period was +4.3%, exceeding the Cabinet Office’s outlook by +2.9%. However, considering the fact that Jul-Sep period performance fell by -10.0% q/q, the extent of growth is not great, though Oct-Dec period performance shows orders to be definitely making a comeback.

◆Looking at orders by source of demand in December, the manufacturing industries suffered declines for the second consecutive month at -3.4% m/m. However, our assessment is that on average, performance continues to mark time. Meanwhile, the non-manufacturing industries (excluding shipbuilding and electrical power) grew for the first time in two months at +8.5% m/m.

◆Machinery orders are expected to gradually recover to a growth trend. According to the December BOJ Tankan, manufacturers are cautious in regard to capex, while non-manufacturing maintains a healthy attitude toward capital expenditure. With favorable domestic demand, the non-manufacturing industries are expected to carry out investment in energy saving and labor saving as a means of dealing with the shortage of manpower. The BOJ’s introduction of negative interest is expected to bring down capital procurement costs for corporations, and this should bring further underlying support for capex. However, the sense of uncertainty regarding the future of the world economy is growing stronger, and this is a point which gives pause. Corporations may become even more cautious in regard to capex spending due to the worsening of the external environment, especially amongst export driven manufacturers.