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 The data are highly volatile, but serve as an indicator of capital
spending in six to nine months and May's shocking 19.5 percent slump
raised questions about the economy's ability to tide over a dent in
consumption caused by an April 1 sales tax hike.
Economists polled by Reuters had expected a modest 0.7 percent rise.
One explanation for the nasty surprise was that companies rushed to
take advantage of new tax incentives introduced in January before
the end of last financial year in March, instead of spreading
spending more evenly.
That flattered January-March capital spending and led to a slump in
April and May.
"This shows the huge spike in capital spending in January-March was
just an aberration," said Yasutoshi Nagai, chief economist at Daiwa
Securities.
"Some people have said capital spending could lead economic growth
but unless you have rising demand, you can't expect capital spending
to grow."
Officials at the Cabinet Office that released the data on Thursday
said there were no special factors behind the May slump, noting they
had not heard companies blaming the sales tax increase for a fall in
orders.
Corporate investment is one of the essential and so far missing
ingredients of Prime Minister Shinzo Abe's recipe for economic
revival.
Now in its second year and commonly referred to as "Abenomics" it
promises to lift Japan from nearly two decades of stagnation and
deflation with a combination of massive monetary stimulus, budget
spending and growth-friendly reforms.
"Abenomics" scored early successes, boosting financial markets,
business and consumer confidence and bringing windfall profits for
exporters after successfully reversing years of debilitating
excessive yen strength.
Japan's economy grew an annualised 6.7 percent in the first quarter,
its fastest since July-September 2011.
Confident that the economy had enough momentum, the government went
ahead with a long-debated sales tax increase to shore up its
stretched finances assuming that a gradual pick-up in corporate
investment would more than offset a temporary consumption dip.
Recent data appeared to back that view with industrial output
picking up, unemployment at record lows, and the Bank of Japan's
quarterly "tankan" survey showing companies optimistic about their
outlook and planning to ramp up capital spending.
The slump in May, led by the electric machinery, chemicals,
transportation and financial sectors, follows a 9.1 percent fall in
April and suggests a negative figure for April-June, which would be
the first quarterly decline in five quarters.
Compared with a year earlier, core machinery orders, which exclude
ships and electric power utilities, fell 14.3 percent in May,
against an expected 9.5 percent gain.
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The numbers are likely to disappoint central bank officials, who
will review monetary policy next week and are expected to keep
intact its massive stimulus programme and consider cutting its
economic forecast for the current fiscal year.
But economists, noting the volatility of the data, are not
abandoning just yet their base scenario that the economy will
rebound after a temporary tax-related hit and expect the BOJ to do
the same.
Strong corporate earnings and the need for upgrades of ageing
equipment and facilities, particularly among non-manufacturers,
argue for recovery in investment, they say.
"I still expect capital spending to resume picking up in the latter
half of the current fiscal year to March, given ample cash flow at
companies," said Yasuo Yamamoto, senior economist at Mizuho Research
Institute.
Economists said, however, that June data, which will also include
companies' quarterly forecasts, would be crucial for the outlook and
assessment of "Abenomics" performance.
"If machinery orders continued to be weak in June, that would be
worrisome and it could force the Bank of Japan to alter its scenario
that capital spending would offset weakening consumption," said
Takeshi Minami, chief economist at Norinchukin Research Institute.
In an encouraging signal for the outlook of domestic demand, the
Cabinet Office said on Thursday that consumer confidence edged up in
June, and raised its assessment on consumer confidence, saying it is
picking up.
But some economists noted that continued weakness in Japan's exports
might be a greater concern than any lingering effects of the April 1
tax hike.
"It's the external sector that is showing signs of deteriorating and
that is something that needs to be addressed in terms of the BOJ's
outlook that we get next week," said Robert Rennie, chief currency
strategist at Westpac Bank.
(Additional reporting by Leika Kihara; Writing by Tomasz Janowski;
Editing by Eric Meijer)
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