February 2016 Machinery Orders

◆According to statistics for machinery orders in February 2016, the leading indicator for domestic capex, private sector demand (excluding shipbuilding and electrical power), orders declined for the first time in three months at -9.2% m/m, while exceeding market consensus at -12.0%. January results saw major growth due to special factors, so the negative results in February were in line with market expectations. Hence the major m/m decline should not be viewed pessimistically. On average, domestic demand is evaluated as marking time.

◆Looking at orders by source of demand in February, the manufacturing industries suffered declines for the first time in two months at -30.6% m/m. This is a reactionary decline after the major orders received by the iron & steel industry in January. Meanwhile, the non-manufacturing industries (excluding shipbuilding and electrical power) grew for the third consecutive month by +10.2% m/m. Non-manufacturing is now considered to be in a moderate growth trend despite some ups and downs.

◆Machinery orders, the leading indicator for capex, are expected to continue marking time in the future. With the introduction of a negative interest rate by the BOJ, corporations are benefitting from a decline in the cost to procure capital, and this is expected to provide underlying support for capex spending. Meanwhile, supply and demand for labor remains tight, hence we should be able to expect the non-manufacturing industries, which are not so easily influenced by overseas demand, to invest in labor-saving and manpower-saving devices. On the other hand, a worsening external environment as seen in the economic slowdown in the emerging economies and the accelerating tendency toward a strong yen/weak dollar situation will likely become a drag on the business performance of export-driven industries, especially in manufacturing, and this is cause for concern. If the assumption of good business performance, which provides the support for capex spending, should collapse, corporations could become more cautious regarding capex.