Japanese machinery orders -- a key gauge of capital spending -- fell in May but were better than economists expected, data showed yesterday, offering a ray of hope for the economy after a barrage of gloomy data.
The figures have yet to convince economists that Japan was out of the woods but they stood in sharp contrast to a host of other recent data suggesting the world's second largest economy had probably contracted for a second straight quarter in April-June and slipped into its fourth recession in a decade.
"The headline number looks relatively firm, all things considered. But having said that, this is an extremely volatile series and we had a very sharp decline in Q1 [first quarter]." said James Malcolm, economist at JP Morgan in Tokyo.
Japan's private-sector machinery orders, excluding ships and electric utilities, fell 2.1 percent on a seasonally adjusted basis in May from the previous month, the government's Economic and Social Research Institute said.
That was better than a median forecast of a 5.9 percent decline forecast by economists surveyed by Reuters last week and followed a 6.3 percent rise in April.
The data were seen relieving some pressure off Prime Minister Junichiro Koizumi's government, whose structural reform policy has been criticized by some as anti-growth, and from the Bank of Japan, who were to hold a policy meeting later this week amid growing calls to further ease its already loose monetary policy.
An official at the government's Cabinet Office said the relatively resilient May data meant orders for the April-June quarter would probably exceed the government's forecast for a 0.4 percent quarter-on-quarter gain -- a projection which economists had earlier brushed aside as being too optimistic.
Still, the official said that the downtrend for machinery orders was intact and a relapse could be seen later in the year.
"The June report due out next month will be important because it will include forecasts for the July-September quarter, which will show us if corporations are still expecting growth ahead," said Minako Iida, economist at Deutsche Securities in Tokyo.
The volatile data series is regarded as a key leading indicator of corporate capital spending about six to nine months in the future.
"I would hesitate to describe it as a source of optimism, but it is one indicator which is not really plummeting at the moment when the expectations were that this was one of the more sensitive indicators in the business cycle," said Richard Jerram, economist at ING Barings.
"My concern in general is that profits drive machinery orders and profits are clearly taking a beating at the moment," he added, however. "So I view it as more of a temporary respite more than anything."
The Nikkei average of Japan's bluechip stocks pared losses after the industrial orders data. It closed 0.54 percent lower on the day but was up sharply from the day's trough which was more than two percent beneath Friday's close.
In another set of economic data bucking the trend, the Bank of Japan said earlier yesterday that Japan's most widely watched measure of money supply -- M2 plus certificates of deposit -- posted its biggest year-on-year rise in 20 months in June.
The central bank said its so-called quantitative easing may be having some positive effect on money supply.
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