Japan Machine Orders Rise More Than Expected; Recovery May Last

From Bloomberg.com

By Jason Clenfield and Tatsuo Ito

Nov. 11 (Bloomberg) — Orders for Japanese machinery rose more than twice the pace economists estimated in September, signalling that a recovery in the world’s second-largest economy may be sustained.

Orders, an indicator of business investment in three to six months, climbed 10.5 percent from a month earlier, the Cabinet Office said today in Tokyo. The median estimate of 25 economists surveyed by Bloomberg was for a 4.1 percent increase.

The yen gained and stocks rose, led by machinery makers Fanuc Ltd. and Kubota Corp., after the report showed businesses are becoming more willing to invest in equipment as profits recover. Companies from Toshiba Corp. to Elpida Memory Inc. have announced plans to build factories or increase capacity in the past month after beating their own earnings estimates.

“The bottom is probably behind us for capital spending,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. “The retrenchment phase is over and the corporate sector as a whole should gradually pick up in a self- sustained way.”

The yen climbed to 89.61 per dollar at 12 p.m. in Tokyo from 89.76 before the report was published, building on the currency’s 7 percent advance in the past three months. The Nikkei 225 Stock Average added 0.2 percent. The Topix Machinery Index of 124 companies advanced to the highest this month.

Second Expansion

Figures due Nov. 16 may show Japan’s economy grew at a 2.9 percent annualized pace last quarter, according to the median estimate of economists surveyed by Bloomberg. It would be the second consecutive expansion since the economy emerged from its worst postwar recession and the first since Prime Minister Yukio Hatoyama’s government took power in September.

Reports today showed the recovery in China, Japan’s largest market, is gathering steam. Industrial production rose 16.1 percent in October from a year earlier, the most since March 2008, the statistics bureau said in Beijing. Retail sales gained an annual 16.2 percent, and urban fixed-asset investment climbed 33.1 percent in the first 10 months of this year.

Japan’s business spending may add to growth for the first time since the first three months of 2008, analysts predict. The Cabinet Office today forecast orders will increase 1 percent in the three months ending Dec. 31, which would be the first advance in seven quarters. It also raised its assessment of the indicator, saying that it is showing signs of bottoming.

Level Still Low

“The level of capital spending is still very low even though it started to pick up,” said Rei Tsuruta, economist at Mitsubishi UFJ Research and Consulting Co. in Tokyo. “Today’s report showed signs that spending is starting to bottom.”

A rebound in capital spending, which accounted for about a third of the economy’s growth during the six-year expansion that ended in 2007, would lend stability to a recovery that has depended on temporary factors including government stimulus and a rebound in production spurred by run down inventories.

Improved earnings have provided companies with money to invest, while economic growth in Japan’s overseas markets has rekindled demand. Exports grew 10.4 percent last quarter from the previous period, according to Cabinet Office trade figures measured by volume.

Pretax profit at the more than 900 Japanese companies that had announced earnings as of Nov. 10 doubled in the quarter ended Sept. 30 from the previous three months, according to data compiled by Bloomberg News. Even after the gain, profit was still 40 percent below the same period last year.

Toshiba’s Factory

Better earnings are already encouraging companies to spend. Toshiba, Japan’s biggest maker of semiconductors, said last month it will spend 25 billion yen ($277 million) to build a lithium-ion battery plant in Niigata, northern Japan. Cost cuts last quarter helped the company narrow its loss to 200 million yen from 27 billion yen during the same period last year.

Elpida Memory, Japan’s largest computer memory-chip maker, last week raised its estimate for capital spending in the fiscal year by 50 percent to 60 billion yen, citing increased orders for gear to make more advanced semiconductors. Shares of machinery makers have risen this year, with Fanuc up 21 percent and Advantest Corp. climbing 41 percent.

“Executives feel that we’ve escaped the crisis and now we have to think about a more normal situation,” said JPMorgan’s Adachi. “It’s less benign than in the five years through 2007, but there’s still going to be positive growth and you have to compete with competitors in Asia.”

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Tatsuo Ito in Tokyo at tito@bloomberg.net.

Last Updated: November 10, 2009 22:04 EST

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