June 2016 Machinery Orders

◆According to statistics for machinery orders in June 2016, the leading indicator for domestic capex and private sector demand (excluding ships and electrical power), orders grew for the first time in three months by +8.3% m/m, while also exceeding market consensus at +3.2%. As a result, Apr-Jun period private sector demand (excluding ships and electrical power) recorded a decline of -9.2% q/q, falling below the original forecast of -3.5% announced by the Cabinet Office.

◆Looking at orders by source of demand in June, the manufacturing industries grew considerably for the first time in three months by +17.7% m/m. Non-manufacturing orders (excluding ships and electric power) also grew for the first time in four months by +2.1% m/m. Meanwhile, overseas orders grew for the first time in three months by +10.8% m/m.

◆Machinery orders, the leading indicator for capex, are expected to win moderate growth in the future. With supply and demand for labor remaining tight, the non-manufacturing industries, which are not so easily influenced by overseas orders, are expected to maintain stable business performance, which should encourage investment in rationalization and labor-saving devices. Meanwhile, in the short-term, 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. However, 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 good business performance, a prerequisite for the support of capex spending, should collapse, the number of corporations putting off capex spending could increase.