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Tue, Jul 10, 2007 - Page 10 News List

Japan's upbeat data eases fears

EASING CONCERNS Firms have been investing heavily in new plants and equipment as they enjoy the fruits of the economy's recovery, but the pace of growth has been slowing

AFP, TOKYO

Japan's core private-sector machinery orders jumped by much more than expected in May, the government reported yesterday, easing concerns about a slowdown in corporate capital spending growth.

The upbeat data rekindled speculation about a possible interest rate rise by the Japanese central bank next month as part of its intention to tighten monetary policy gradually in line with the economic recovery.

The core orders, seen as a key leading indicator of corporate capital spending, rose by 5.9 percent in May, beating market forecasts for a gain of 2.6 percent after April's month-on-month rise of 2.2 percent.

Year-on-year, core orders -- which exclude volatile components such as power companies and ships -- were down 3.1 percent in May, after a drop of 9.0 percent in April, the Cabinet Office said.

Economists said the data supported the Bank of Japan's case for another interest rate rise from 0.5 percent, although there was also caution about whether the rise in orders marked a change in the weak trend of the past year.

The report "helped soothe the anxiety about the cyclical trend of corporate capital spending, thereby removing one of the main obstacles to the widely-conjectured interest rate hike in August," NLI Research Institute senior economist Taro Saito said.

Other obstacles to a rate rise include persistent deflationary pressures, government resistance to another hike and the potential for political instability after the July 29 upper house elections, analysts said.

After the data, the government upgraded its assessment of the core orders for the first time in 11 months, saying the trend was now flat. It had previously said that the orders were weakening somewhat.

But a Cabinet Office official said that orders for semiconductor-processing equipment and tools for making liquid-crystal-displays were still sluggish.

"We are still worried about the trend of overall machinery orders," the official said.

Machinery orders placed by the manufacturing sector were 15.3 percent higher in May than in April, with orders by non-manufacturers down 1.8 percent.

The Cabinet Office forecast that core orders would be 11.8 percent lower in the three months to June compared with the previous quarter.

Japanese companies have been investing heavily in new plants and equipment as they enjoy the fruits of the economy's recovery from its long slump but the pace of spending growth appears to be slowing this year.

"Unless non-manufacturers and small and medium-size firms start spending more on building factories and boosting production capacity, it will be difficult for corporate-sector capital spending to gain further momentum," Norinchukin Research Institute economist Takeshi Minami said.

"After having spent heavily in recently years, there is only limited scope for large manufacturers to boost capital investment any further," he said.

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