March 2016 Machinery Orders

◆According to statistics for machinery orders in March 2016, the leading indicator for domestic capex, private sector demand (excluding shipbuilding and electrical power), orders grew for the first time in two months at +5.5% m/m in defiance of market consensus (-2.0%). Results show Jan-Mar period domestic demand to have achieved growth of +6.7% in comparison to the previous quarter, and exceeded the Cabinet Office’s official outlook of +6.4% q/q.

◆Looking at orders by source of demand in March, the manufacturing industries grew for the first time in two months at +19.7% m/m. Non-ferrous metals and shipbuilding won major growth, helping to push up the amount in overall orders, defeating the effects of last February’s steep reactionary decline. Non-manufacturing orders (excluding shipbuilding and electric power) declined for the first time in four months at -6.9% m/m. however, when non-manufacturing orders are averaged out, they are still approaching a growth trend.

◆Machinery orders, the leading indicator for capex, are expected to mark time in the future. With supply and demand for labor remaining tight, the non-manufacturing industries, which are not so easily influenced by overseas demand, are expected to maintain stable business performance, which should encourage investment in rationalization and labor-saving devices. Meanwhile, demand for machinery is expected to expand, especially for equipment oriented toward restoration and reconstruction of production facilities lost or damaged in the recent Kumamoto earthquake. On the other hand, a worsening external environment as seen in the slowdown of the world economy 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, the number of corporations putting off capex spending could increase.