Machinery Orders Fall in July

Yes, that's right, fall. This isn't the impression you would get from reading Bloomberg though:

Japan's machinery orders surged in July at three times the pace forecast by economists, easing concern the economy will contract for a second quarter.

Orders climbed a seasonally adjusted 17 percent to 1.12 trillion yen ($9.9 billion) from June, the Cabinet Office said in Tokyo today. The gain was led by demand for electronic machinery.

Well this isn't what the Japan Cabinet Office actually say. Here is chapter and verse:

"The total value of machinery orders received by 280 manufacturers operating in Japan fell by 0.6% in July from the previous month on a seasonally adjusted basis."

but as they also indicate:

"Private-sector machinery orders, excluding volatile ones for ships and those from electric power companies,rose a seasonally adjusted by 17.0% in July."

"

So domestic private demand is up, but the total is down (go check for yourself if you want).

The discrepancy is due to the fact, as Bloomberg themselves admit, that:

In a sign that demand outside Japan may be slowing, overseas orders fell 10.8 percent in July, the second monthly drop, today's report showed.

So the real story is that domestic demand picked up significantly, but not enough to offset the strong fall in exports. So the conclusions one would draw are quite different from those we find in Bloomberg. In fact if we look at the estimate the Cabinet Office make of anticipated orders during the third quarter, we will find it is -2.4%, ie they are actually expecting orders to be down over the second quarter, when, we will remember, the Japanese economy actually shrank. So basically, and cteris paribus, we can simply expect more of the same in Q3, and looking out globally, the downside risks on this not very optimistic forecast are quite significant, I think. Anyway, such as it is, here the relevant chart for seasonally adjusted machine orders.

Yen vs Dollar: recent trend

Here is a chart produced by Yahoo Finance of the dollar-yen exchange rate:
This would seem to reinforce Claus's assertion that the BoJ will do nothing with interest rates, as that would only exacerbate the strengthening of the yen versus the dollar. Given that the export sector is supporting Japan's GDP, Japanese officials aren't going to want to touch anything that would damage exports with a ten foot pole...

Japan Contracts in Q2

(cross-post from Alpha.Sources)

I see not reasons to mince my words on this one with the recent stark downward revision of Japanese GDP in Q2.

(From Bloomberg)

Japan's economy contracted at almost twice the pace forecast by analysts in the second quarter, reinforcing speculation the central bank will leave interest rates unchanged this year.

The economy shrank at a 1.2 percent annual rate in the three months ended June 30 as business spending slumped, the Cabinet Office said in Tokyo today. The government initially forecast a 0.5 percent expansion.

Bond yields fell to the lowest level since February last year on expectations the central bank will keep its overnight lending rate at 0.5 percent to prevent the economy from falling into recession. Any rebound in growth depends on the severity of the housing slowdown in the U.S., the biggest export market for Japanese companies including Toyota Motor Corp. and Sony Corp.

``A move by the Bank of Japan is out of the question,'' said Takehiro Sato, chief economist at Morgan Stanley Securities Japan Ltd. in Tokyo. ``A cloud is hanging over the domestic and global economy.''

And for the graphical version ...

For a general assesment of the current economic situation I recommend you to re-visit my recent notes.

Japan - The Fundamentals Linger

Still Holding at the BOJ

Small Update on Japan

Is Japan Heading for a Recession? (GEM note)

As for the immediate outlook in Japan it clearly seems evident now that whatever plans the BOJ might have had to continue normalization must now be shelved. Regarding the general annual growth estimate the current Q2 numbers will obviously weigh negatively in the overall balance. I will however be looking for somewhat of a recovery in Q3 relative to the curren q-o-q -0.3% contraction. The key as is also mirrored in the Q2 figures' steep downward revision of corporate capex will clearly be to what extent business investment will recover. As I argued in my recent GEM note (see link above) a downside has opened below industrial production especially if the US economy continues to linger in the subprime mess; something which seems very plausible at this point. In short, no de-coupling I think. Domestic consumption will likely continue to stay in positive territory but as always with Japan the positive contribution will be most modest. In the end Japan could very well be looking at a H2 which on a q-o-q basis will fair very close to stagnation.

GDP Q2 2007 Downward Revisions

"Is Japan Heading for a Recession?" Claus asks us in his last post, and the answer looking at the latest set of GDP revisions may well be yes.

Japan’s economy shrank more sharply than expected in the second quarter, and revised growth domestic product data released today show an annualised contraction of 1.2 per cent. In general we had been expecting a downward revision following evidence last week that capital spending, a big driver of growth, had slowed sharply. But the fall of 0.3 per cent in quarter-on-quarter terms against a preliminary estimate of 0.1 per cent growth was deeper than even we expected.

The reversal from annualised growth of 0.5 per cent to a decline of 1.2 per cent in the second quarter is explained almost entirely by a change in the assessment of capital spending. Preliminary data indicated that this had grown at an annualised rate of 4.9 per cent, but this figure has now been revised down to a contraction of 4.8 per cent.

This kind of data has lead JPMorgan to revise down its estimate for annual growth in the year to end-March 2007 from above 2 per cent to 1.6 per cent. Even more to the point they now expect the central bank to refrain from a rate rise until at least next year, with the implication that there would be minimum a one-year gap between quarter-point rate increases. And this is at the earliest!

Anyway, here's the revised chart.




My personal feeling is that the Japanese expansion has been steadily losing momentum since the end of 2005. Exceptional global conditions in the last quarter of 2006 gave a hefty push to Japanese exports, and, as a consequence, to capital spending (domestic consumer demand has hardly budged). Since I doubt in the current environment that these global conditions will be reproduced this autumn (indeed, the opposite may hold if the US now goes into recession) I am not anticipating a recurrence of what happened in Q4 2007. It remains to be seen, at a global level, how much of the expansion which took place during the back end of 2006 was really sustainable (on Eastern Europe, which was an important part of the picture I certainly have my doubts) and how much was an "excess" which is now in the process of being corrected. Only time will tell. But in the meantime I am certainly not forecasting any further rate hikes from the BoJ, either in what remains of this year, or during as far forward as we can see into 2008.