Japan's core machinery orders unexpectedly fell for a second straight month in February in a sign that the pace of recovery in companies' capital spending could stay slow and weigh on growth.
The surplus in Japan's current account rose by almost a third in February from a year earlier due to a record annual gain in exports, showing that a steady pickup in exports, particularly to China, will continue to support Japan's economy.
Strong exports should encourage Japanese manufacturers to gradually increase corporate spending as the year progresses, economists say. But non-manufacturers are likely to delay spending due to weak domestic demand, and that will hold back overall growth in capital expenditure.
The decline in machinery orders could cause concern for the government, which took office last September, as it has little leeway to boost the economy with fiscal policy should Japan falter on its gradual recovery path ahead of a mid-year election for parliament's upper house.
The data could also pose a challenge to the Bank of Japan as it could struggle to reconcile its growing optimism on the economy with government pressure to ease monetary policy further.
"This data does fluctuate a lot, but the overall trend is that capex has bottomed out," said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute in Tokyo. "One concern is non-manufacturers pulled down the headline number as domestic demand is weak. From here on, manufacturers will lead gains in capex, but the pace will likely be slow."
Core private-sector machinery orders, a highly volatile series regarded as an indicator of capital spending, fell 5.4 per cent in February, against a median market forecast for a 3.7 per cent rise.
The core orders, which exclude those for ships and machinery at electric power firms, were 7.1 per cent lower than the same month last year, with a 2.0 per cent increase expected.
Orders from manufacturers fell 0.3 per cent in February, with materials sectors such as steel and chemicals putting a drag on the figure. Orders from non-manufacturers fell 4.0 per cent due in part to lower orders from wholesalers, retailers and information services.
The BOJ kept monetary policy unchanged yesterday and made slightly more upbeat comments about capital expenditure and the economy.
But some analysts say the machinery orders data may not go down well with the central bank's argument.
"The BOJ has raised its view on the economy which it says is showing some signs of self-sustained recovery, but that sounds a little too rosy when we look at data like today's," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"Deflation remains the focal point in monetary policy, so the central bank will have no choice but to lean towards easing as long as it cannot see a way out of deflation."
The Cabinet Office stuck to its assessment of machinery orders, saying they are levelling off, but officials remain cautious on the outlook.
"We maintain the view that capital spending is levelling off. We have pointed out the possibility of the economy showing some signs of self-sustained recovery but careful judgment is needed," said Keisuke Tsumura, a parliamentary secretary at the Cabinet Office.
Reuters