Macquarie Research, Surge in machinery orders- Japan data highlight regional pickup

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Surge in machinery orders
Japan data highlight regional pickup
Event
 Japanese machinery orders provide more evidence that regional growth has
re-accelerated and that tightening capacity is driving stronger investment
spending across Asia. The data also follow the pattern of a strong Chinese
new year distortion, with unusual strength in January to be followed by a weak
February.

Impact
 We don’t have many timely indicators of the regional investment cycle, so
Japanese data on foreign orders for machinery and machine tools (February
numbers are out on 10 March) give useful insights. Foreign orders for
Japanese machinery jumped 71% MoM in January to the highest level since
mid-2008. This reversed a couple of soft months and took the QoQ
annualised growth rate up to 36%. Foreign machine tool orders were close to
record levels in January.
 Unfortunately there is no regional breakdown in the machinery orders release.
However, Japanese trade data shows that 62% of general and electrical
machinery goes to Asia, and the recent surge of growth in the region adds to
the probability that this is behind the strong orders for capital equipment. The
strength of the yen makes buoyant foreign machinery orders all the more
impressive. Trade data shows that demand from China has led the recent
pick-up in Japanese machinery exports, which could also be linked to reports
of labour shortages in China.
Analysis
 Despite market focus on inflation risks, we can also see a more positive
dimension to the regional recovery of the past two years, in the form of a
strong capital spending cycle. For example capacity utilisation in Korea is at
record levels, despite a 7% expansion in capacity over the past year.
 One caveat is that it appears that many data releases for January have been
affected by the Chinese new year, with seasonal adjustments struggling to
account for the shift in timing of the holiday from year to year. Korean trade
data has already showed a sharp MoM drop in February, reversing much of a
spike in January, and we should expect a similar pattern elsewhere, rather
than extrapolating excellent January releases.
 Domestically, the situation in Japan is less encouraging. Orders from the
manufacturing sector are back on a rising track having paused with exports in
mid-CY10. However, orders from non-manufacturing are barely flat as the
domestic economy struggles with deflation and poor long-term growth
expectations. The latest round of political turmoil will further reduce the
predictability of policy settings, and deter firms from engaging in long-term
investments that are dependent on domestic growth. At least the implied
boost from exports implied in machinery orders data should help to sustain
Japan’s cyclical recovery.