Japan’s core machinery orders fell in January for the first time in four months due to a big drop in service-sector demand as new curbs to stem the spread of the coronavirus clouded the outlook for business spending.

Policymakers in the world’s third-largest economy are counting on capital expenditure to sustain a private sector-led recovery from last year’s pandemic-induced slump.

Cabinet Office data out on Monday showed core machinery orders, a highly volatile data series seen as a leading indicator of capital spending in the coming six to nine months, fell 4.5% in January from the previous month.

The reading compared with a 5.5% decline expected by economists in a Reuters poll, falling for the first time in four months.

Analysts saw the monthly drop partly as a pullback from solid gains in previous months, while they warned against the risk of a prolonged state of emergency issued in Tokyo areas putting downward pressure on capital spending.

“Machinery orders probably fell in the first quarter as risks remain as to whether the state of emergency may be prolonged,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“A rebound in Chinese economy, the COVID vaccine rollout and U.S. stimulus may be encouraging, but the outlook on business investment will much depend on developments of the pandemic.”

The Japanese economy is expected to have suffered another contraction in the current quarter as COVID restrictions hampered service-sector activity, such as hotels and restaurants, keeping companies from boosting investment.

By sector, orders from manufacturers fell 4.2% month-on-month in January due to electrical machinery and chemicals, while service-sector orders tumbled 8.9%, down for the first time in four months.

Industries such as transportation and postal services, financial and insurance, and information services dragged down service-sector orders.

External orders, which are not counted as core orders, rose 6.4%, up for a fourth straight month.
Compared with a year earlier, core orders, which exclude those for ships and electric utilities, grew 1.5% in January, versus a 0.2% decline forecast by economists, the data showed.

The Cabinet Office stuck to its assessment on machinery orders, describing them as picking up, having upgraded it for the third straight month.

However, a Cabinet Office official warned capex trends would largely depend on coronavirus developments.

Reuters