TOKYO: Japan's core machinery orders fell much faster than expected in October in a sign deepening worries about the euro zone debt crisis and a strong yen are making firms slash capital spending, casting a pall over the economy's tentative recovery.
Core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, slumped 6.9 percent in October from the previous month, government data showed on Thursday.
The fall compared with a median market forecast for a 0.5 percent drop and follows an 8.2 percent slump in September, leaving orders just 1.5 percent above year ago levels.
The data adds to growing signs of malaise in the world's third-biggest economy, which has just rebounded from an earthquake-triggered recession, with exports and business sentiment slumping under the weight of a global slowdown.
"Machinery orders are flattening as uncertainty has heightened since the summer due to Europe's debt crisis, US slowdown and the yen's rise," a government official said.
Core orders fell below 700 billion yen ($9 billion) for the first time this year as corporate spending has been struggling to recover to levels seen before the collapse of Lehman Brothers in 2008 that triggered the last financial crisis.
"Machinery orders won't continue to fall but instead are likely to stagnate. We won't have a recession. However, growth is likely to be very slow," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.
SOFT PATCH
Takeshi Minami, chief economist at Norinchukin Research Institute, said two quarters of shrinking economic output -- technically defined as a recession -- could not be ruled out even though he referred to it as a "soft patch" rather than a serious downturn.
"Given rapidly slowing global economy and declining Japanese exports, the economy may contract slightly in October-December and January-March, until it gets a boost from reconstruction-related public spending in April-June," he said.
The yen hit record highs against the dollar in October, prompting Japanese authorities to spend a record amount intervening in currency markets to stifle its gains in an effort to help the export-led economy. October trade and current account data highlighted the pain with the current account surplus marking its eighth month of sharp annual declines and trade balance swinging into a deficit.
The yen's gains have slowed, but traders expect the currency to continue drawing steady demand as a safe-haven currency amid escalating market tension over Europe's debt crisis.
In a sign of further weakness in corporate spending, Japan's manufacturers turned pessimistic for the first time in six months on the euro zone crisis and global slowdown, a Reuters survey that is highly correlated with the Bank of Japan's quarterly tankan survey showed on Wednesday.
Underlining sluggish business expenditures, Japanese bank lending rose a meagre 0.2 percent in November from a year earlier, posting the first annual gain in two years.
Companies surveyed by the Cabinet Office last month forecast that core machinery orders will fall 3.8 percent in October-December, after increasing 1.5 percent in the previous quarter, and the latest data reinforce such a scenario.
Japan's economy grew briskly in the third quarter, rebounding from a slump triggered by the devastating March 11 earthquake but is expected to slow sharply this quarter, with the outlook clouded by the yen's strength and slowing overseas demand for its goods.
The Bank of Japan loosened monetary policy in October to ease the pain from yen rises and global uncertainty, and has expressed its readiness to act again if risks to Japan's recovery materialise. The board next meets for a policy review on Dec. 20-21.
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