Japan machinery orders decline less than expected in August

Data released earlier on Wednesday showed that Japan's machinery orders declined for the first time in three months in August, however, the rate of declines was much less than expected. Data offered cause for cautious optimism that machinery orders might just start to provide some modest support to GDP growth again over coming quarters.

Core machinery orders, regarded as an indicator of capital spending in the coming six to nine months, fell 2.2 percent month-over-month in August. The fall compared with a 5.5 percent decline forecasted and followed a 4.9 percent increase in July. Compared with a year earlier, core orders were still up more than 11½ percent, the strongest increase since June 2015 versus a 6.5 percent gain expected by economists.

Details of the report showed that orders placed by non-manufacturers were down almost 2 percent m/m and orders placed by manufacturers were down 4 percent m/m. The drop in manufacturing orders was more than fully accounted for by a 60 percent m/m decline in the iron and steel sector, while a drop of more than 20 percent m/m in the telecommunications sector also weighed heavily on overall non-manufacturers orders, and more than half of all subsectors posted gains.

On average so far in the first two months of Q3, total core orders were up more than 8½ percent compared with the average in Q2. A further rise in the backlog of orders to the highest level since last November suggests some support to capex over coming months as that returns back to a more normal level.

"Capital spending is holding firm although it is not so strong as being a driver of GDP growth," said Yuichiro Nagai, economist at Barclays Securities.