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December 2017 Machinery Orders

Lull in manufacturing orders causes concern – possible slowdown due to capex cycle

February 15, 2018

Kazuma Maeda

Shunsuke Kobayashi

Summary

◆According to statistics for machinery orders in December, the leading indicator for domestic capex and private sector demand (excluding ships and electrical power), orders declined by -11.9% m/m, while at the same time falling significantly below market consensus (-2.0%). Manufacturing suffered a decline of -13.3%, while non-manufacturing also fell by -7.3%. Meanwhile, the Cabinet Office forecast for the Jan-Mar 2018 period sees growth of +0.6% q/q.


◆Manufacturing orders suffered a major decline in December, and are expected to continue the downtrend with the outlook for the Jan-Mar 2018 period at -5.7% q/q. It appears that manufacturing orders are experiencing a lull in the growth phase which had been seen up to this point. In contrast, non-manufacturing orders, which had been in a declining trend until now, are seen moving to the positive side with an outlook of +7.4% for the Jan-Mar period.


◆Machinery orders, the leading indicator for capex, are expected to exhibit moderate growth in the future, and then slow down by around 2019 at the latest. In manufacturing, expanding exports are expected to act as a tailwind in generating replacement demand for machinery and facilities, but considering the ten year cycle which tends to drive capex, there is a good possibility that a slowdown will occur by around 2019 at the latest. On the other hand, in the non-manufacturing industries, investment in transportation and logistics infrastructure to handle growth in the number of foreigners visiting Japan appears promising, along with IT investment to handle the tight labor market. It should be noted, however, that due to the shortage of manpower, goods and services of this type face strict supply constraints, and this is cause for concern.

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