Machinery orders fell sharply in Japan in September, far more more than economists had forecast, and this may well be a sign that companies are reducing investment as demand wanes.
Machinery orders in fact declined a seasonally adjusted 7.6 percent to 958.7 billion yen ($8.5 billion) from August, which was the lowest level since May 2005, according to data from the Cabinet Office today. Machinery orders are often thought to indicate corporate investment in about three to six months. Total orders fell from 3.6% in the third quarter, and overseas orders fell 2.2%, but demand from domestic private customers was a plus and grew 3%. The big hit was in government orders, which drpoode a whopping 26.2%. In fact the volatility in government orders makes this data very hard to read, and anyone with any insight into just why this should exist in this way, please feel invited to drop a comment.
One explanation for the downturn is that the recent financial-market turmoil and the yen's 8 percent surge against the dollar since July may have deterred companies from ordering more machinery in September. Certainly the continuing slide in the value of the dollar will not be generating an overly enthusiastic and optimistic atmosphere among exporters.
The quote of the day, tucked away in the Bloomberg coverage, is certainly this one:
``My advice to investors is to fasten your seatbelts,'' said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo. ``Orders peaked in July, and we're not expecting a rebound until the second half of next year.''
And meanwhile domestic demand remains as weak as it ever was. More confirmation of this is available today with the issuing of latest edition of the Economy Watchers index. Japanese workers, consumers and small businessmenhave become increasingly pessimistic about the current and future economic conditions in Japan according to a survey released today by the Cabinet Office.
The main index of the Economy Watchers Survey fell 1.4 points to 41.5 in October, the lowest reading since March 2003 and the seventh straight month of decline. The index, which gauges the mood among ordinary Japanese workers who can observe economic developments firsthand such as taxi drivers and shop keepers, has now been below the boom-or-bust line of 50.0 for seven straight months.
Three subindexes that dropped in the month were the household spending index, which fell 0.4 points to 41.3, the corporate index, which declined 2.5 points to 41.0 and the employment index, which dropped by 5.0 points to 43.8.
In addition the housing outlook is turning increasingly - and almost alarmingly - negative. In September Japan's housing starts fell by 44% (y-o-y) and this followed falls of 43.3% in August and 23.4% in July. The main cause of the rout was a new building standards law introduced in June. The law was aimed at ensuring building safety measures, but the apparent lack of adequate warning before the law was enforced caused a sudden, drastic increase in paperwork to get a building permit, and a sharp delay in initiating new buildings. But this kick-stop on the permits front now seems to have initiated a more general problem, since it coincided with the global tightening in bank lending conditions.
The watchers survey showed 41.7% of survey respondents said housing-related spending was worse than three months ago.
Is Japan Recession Bound?
Well as Scott said yesterday it is "hard to see how Japan can avoid a recessionary 4th quarter". This is also the gist of Claus's much longer analytical post, and I cannot but agree.
So at this point I think we need to bear a number of issues in mind. The principal one of these is that recent Japanese recessions have tended to be messy long-drawn-out affairs. In fact Japan has had three recessions since the bursting of the stock and property bubbles in the late 1980s early 1990s. The first lasted 32 months from March 1991 to October 1993, and the second dragged on for 20 months from June 1997 to January 1999. The most recent recession ran for a full 14 months from December 2000, following the bursting of the information-technology boom and the impact this had on exports and capital investment. This is perhaps why all those Japanese investors and businessmen are looking with something more than a simple wary eye on the sub-prime turbulence which is coming out of the United States at the present time.
But if Japanese recessions have grown longer, and more intractable, and deflation has proved to be persistent and equally intractable, and if interest rates, even in the longest boom since the end of the 1980s bubble, still have not been able to get raised above the 0.5% threshold, then isn't really time that more people started to ask themselves more questions about just what is (and has been) going on in Japan. Is it just a coincidence that Japan now has the highest median age on the planet? Is it really the case that 30 years of below replacement fertility is so harmless as almost everyone seems to believe? Isn't it worth just allowing ourselves to ask the question whether all this might not be somehow interconnected, because one thing is sure, until we get the right diagnosis there is very little chance we are going to be able to apply the adequate medicine and cure. Now what was it you said that patient had doc? Appendicitis, or simply indigestion. Somehow I think the answers we let ourselves give to the question we allow ourselves to ask might turn out to be pretty important when it comes to the outcome we may lead ourselves to expect.