Japan’s machinery orders were expected to rebound only modestly in May, a Reuters poll found, as a strong yen and weak overseas demand clouded the outlook for capital investment.
Core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending, were seen likely to grow 2.6% in May after falling 11% in April, the poll of 19 economists found. Core orders, which exclude those of ships and electrical equipment, were expected to have fallen 8.7% in May from a year ago, after a 8.2% decline in April.
“Firms’ capital spending is expected to stay solid over the medium term due to the need to upgrade ageing facilities, special demand from the Tokyo Olympics, and inbound investment,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“But there are worrying factors such as growing risks to the economy in Japan and overseas, and concerns about corporate earnings due to a strong yen,” he said. Minami added that fears about harmful consequences from Britain’s vote to leave the European Union could make Japanese firms more cautious about investing.
The Cabinet Office will publish the data on Monday. On Tuesday, the Bank of Japan will announce the June corporate goods price index (CGPI), which measures the prices companies charge each other for goods and services. The CGPI was expected to fall 4.2% in the year to June, a 15th straight monthly fall reflecting weak domestic demand and the strong yen pushing down import prices.
There is growing speculation that the BoJ will adopt fresh stimulus at its policy meeting later this month as weak consumption, the strong yen and external headwinds hold back growth and stifle inflation.
Sentiment in Japan’s service sector hit a new low in June due to a stronger yen and weaker stock prices following Britain’s surprise vote to leave the European Union, adding to headaches for policymakers already worried about sputtering economic growth.
The survey of workers such as taxi drivers, hotel workers and restaurant staff — dubbed “economy watchers” for their proximity to consumer and retail trends — showed their confidence fell 1.8 points from the previous month to 41.2 in June. It was the lowest reading since October 2014, data released on Friday by the Cabinet Office showed.
Japanese policymakers and markets have been on high alert about the Brexit-induced market turmoil, prompting the country’s top currency diplomat, Masatsugu Asakawa, to warn earlier on Friday that the government was ready to respond to any speculative moves in the foreign exchange market.
Meanwhile, Sentiment in the service sector and the retail industry was especially low on fears that a stronger yen and lower stock prices triggered by the Brexit would dampen already weak consumer spending.
“There are more uncertainties in economic outlook following the Brexit, and the wealthy are refraining from spending. There are few factors to stimulate spending among the middle class as well. Even though the sales tax hike was delayed again, it’s difficult to think that the situation would improve in the future,” said a respondent from the retail industry. The outlook index, which indicates the level of confidence in future conditions, tumbled 5.8 points to 41.5 in June, the worst level since March 2014, as worries about a post-Brexit market turmoil and the global economy cast a shadow over sentiment in the service sector. Poor service-sector sentiment in June comes after data released earlier in the day showed gains in price-adjusted real wages slowed further in May.
Weak service-sector sentiment and sluggish wage growth are bad news for Prime Minister Shinzo Abe, who has struggled to beat two decades of deflation and boost spending through his reflationary Abenomics policy.
“Wages aren’t changing and bonuses aren’t increasing. Consumers’ desire to spend is lowering. They don’t feel they want to buy anything, so the economy doesn’t improve,” said another respondent from the retail industry. The lacklustre data also ramps up pressure on Abe’s government before elections to the upper house this Sunday and the announcement of an economic stimulus package this autumn.