UPDATE 1-Japan machinery orders jump but outlook in doubt

(For more stories on the Japanese economy, click [ID:nECONJP])

* Services sector not participating in capex recovery

* Annual wholesale price falls ease, but deflation to persist

By Tetsushi Kajimoto

TOKYO, Feb 10 (BestGrowthStock) – Japan’s core machinery orders
jumped more than 20 percent in December, but that failed to
alleviate concerns about capital spending and the tepid economic
recovery as the services sector is still slashing its spending.

The slide in wholesale prices eased as expected, but
deflation is still likely to persist for at least a few years as
weak domestic consumption pushes companies to cut prices to lure
consumers.

“If you look at the quarterly data, non-manufacturers are not
doing very well,” said Yoshiki Shinke, senior economist at
Dai-Ichi Life Research Institute.

“This is a sign that domestic demand isn’t strong and this
will weigh on capital expenditure somewhat. We can still expect
capital spending to grow this year due to manufacturers’
investment … but without much of a contribution from the
services sector, overall spending growth will be gradual.”

But Shinke said he didn’t expect the data to translate into
greater government pressure on the central bank for further steps
to support the economy ahead of elections mid-year.

“There isn’t much pressure on the Bank of Japan to respond to
the tepid outlook for capital spending as the economy is
gradually recovering in line with BOJ forecasts,” he said.

Core machinery orders, a highly volatile series seen as an
indicator of capital spending, jumped 20.1 percent in December
from a record low hit in November.

That was well above a median market forecast for an 8.0
percent gain. In October-December core orders rose 0.5 percent,
following a 0.9 percent drop the previous quarter. [JPMORD=ECI]

For a graphic of machinery orders, click

http://link.reuters.com/zeh68h

Japanese government bond futures slipped after the
stronger-than-expected figures, with the benchmark 10-year yield
climbing 1.5 basis points to 1.350 percent (JP10YTN=JBTC: ). [JP/]

But as the monthly data tend to swing about, economists
focused on the breakdown of the quarterly numbers.

Orders from manufacturers rose 17.8 percent in
October-December as a recovery in exports prompted car and
electronics makers to spend more, but orders from
non-manufacturers fell 8.4 percent, reflecting weak domestic
demand.

“Looking at the December number and then thinking that
Japanese capex is starting to show strength is misplaced,” said
Takuji Okubo, chief economist at Societe Generale.

“We have to look for more — stronger growth
quarter-on-quarter — and it’s not there.”

Weak capital spending has been a drag on Japan’s economy,
which has emerged from its worst postwar recession thanks in
large part to strong growth in Asia, boosting Japan’s exports to
the region.

Many companies have been cautious about expanding their
production capacity, with capacity utilisation still about 20
percent below the level before the global financial crisis.

In addition, worries remain about the outlook of the economy
after stimulus measures are withdrawn later this year.

Japan’s economy has been recovering since early last year and
data due on Monday is expected to show the economy grew at at its
fastest pace in almost two years last quarter. [ID:nTOE61706B]

But economists expect growth to slow in the first half of
this year because falling wages are likely to dampen consumption.

Weak domestic consumption is keeping corporate activity in
check, driving domestic wholesale prices down.

Wholesale prices, as measured by the corporate goods price
index (CGPI), fell 2.1 percent in the year to January, less than
a median market forecast of 2.3 percent fall.[JPCGP=ECI]
[JPCGPY=ECI]

Although annual wholesale price deflation has eased on recent
rises in oil prices and is seen shrinking further, many
economists think it will take time for wholesale prices to start
rising, as domestic demand remains weak.

Stock Market Trading

(Reporting by Tetsushi Kajimoto and Rie Ishiguro)

UPDATE 1-Japan machinery orders jump but outlook in doubt