Japan Machinery Orders Slump

Wow, get this from Bloomberg today:

Japan's Machinery Orders Drop Most in Almost 20 Years

Japan's machine orders fell the most in almost 20 years, dashing expectations that the central bank will raise interest rates before the end of the year.

Non-government orders excluding shipping and utilities dropped a seasonally adjusted 16.7 percent in July from a month earlier, the largest slide since October 1986, the Cabinet Office said today. Orders from semiconductor, steel and mobile-phone businesses paced the drop.

``With risks over the U.S. economy looming large, we don't think the Bank of Japan can raise rates'' before March 31, said Yoshimasa Maruyama, an economist at BNP Paribas Securities in Tokyo. ``While part of the drop is a correction from several months of strong data, this was still a considerable decline.''

Today's drop ``is payback for strong orders in recent months,'' said Itsushi Tachi, director of business statistics at the Cabinet Office. ``The trend is for growth.''

The government forecasts machinery orders will increase 4.9 percent in the quarter ending Sept. 31.

``To reach this target, we need growth of 16 percent in August and September,'' Tachi said.

I will write and post more on this as and when I have some time. For now I would just point out that on both this and the German front I have long forseen what was going to happen and in a certain sense the data is now 'coming home to Daddy', although I can't say that this makes me especially happy: I would prefer to have been wrong.

More fuel on the fire will definitely comes from this news last Friday in the US:

"The Federal Reserve reported Friday that consumer borrowing rose at an annual rate of 2.8 percent in July, down from an increase of 7.3 percent in June."

"The slowdown was led by a sharp deceleration in credit card debt, which rose by just 3.4 percent in July after gains of 13.2 percent in June and 13 percent in May."
Associated Press

This is what we could call a second stage event, and now has all the hallmarks of a classic domino chain, although it still isn't clear how far it will reach (all the way to Shanghai??). I am not at all convinced that investment in the US will take up the slack given what we know about fixed capital investment in China, and given the way capacity in things like machinery and equipment has just been ramped up so much in Germany and Japan. As we can see, in Japan it is fixed capital investment that is being hit first.

So watch out everyone, 2007 could be a very complicated year.

Basically the whole Greenspan/Bernanke hand-over was bungled, they should have had one token pause back in November, then Bernanke wouldn't have had to prove his inflation fighting prowess so, and advance over what seems to have been a bridge too far. (I was in fact arguing this back then on this blog).

Also the central bankers collectively should carry some of the can, if what looks like it might happen actually does, since all this 'inflation fighting' jargon has really been quite stupid. As Rogoff has been arguing, what we really have is a change in the terms of trade.