May 2016 Machinery Orders

◆According to statistics for machinery orders in May 2016, the leading indicator for domestic capex and private sector demand (excluding ships and electrical power), orders fell for the second consecutive month by -1.4% m/m. Meanwhile, results contradicted market consensus, recording a decline in comparison to the +3.2% forecast, producing a decidedly negative conclusion. Private sector demand (excluding ships and electrical power) appears to be headed toward peaking out after recording moderate growth since the middle of 2015.

◆Looking at orders by source of demand in May, the manufacturing industries fell for the second consecutive month by -6.4% m/m. The manufacturing industries are experiencing stagnant orders across the board, due to the stagnant domestic economy and the strong yen. Non-manufacturing orders (excluding ships and electric power) declined slightly for the third consecutive month by -0.3% m/m. Non-manufacturing orders appear to be taking a breather after the growth trend seen up to this point.

◆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.