Japan machinery orders suffer worst fall in two years

Japan's core machinery orders plunged at the fastest pace in two years, the government said Thursday, reinforcing fears that Asia's largest economy has slipped into a recession. The core private-sector machinery orders, a leading indicator of corporate capital spending, slumped 14.5 percent in August from the previous month, falling for a third straight month, the Cabinet Office said. It was the steepest fall since a 15.9 percent drop in July 2006 and worse than the market's average forecast for a fall of around 3.6 percent. "Companies are growing cautious about capital spending as their business outlooks are worsening," noted Naoki Murakami, chief economist at online securities firm Monex. "The US economy will not bottom out at least until mid-2009. Japan, which cannot move to ease credit by itself, will continue to depend on the US and world economies," he said. "Investment on plants and equipment will likely slow, particularly among manufacturers, as exports plunge due to economic slowdowns in emerging countries," Murakami said. Major central banks in the United States, Europe and Canada cut interest rates Wednesday in a joint effort to ease a global credit squeeze. China also reduced borrowing costs, but the Bank of Japan did not participate as its benchmark rate is already low at 0.5 percent. Machinery orders placed by the manufacturing sector in August tumbled 13.9 percent from the previous month. Orders by non-manufacturers were down 14.9 percent, the Cabinet Office said. But it was "unlikely that such a sharp fall as in August will continue" given buoyant investment in research and development, said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo. "Due to the turmoil in financial markets, however, there is no doubt that companies are growing cautious," he said in a report. Hiroshi Watanabe, economist at Daiwa Institute of Research, noted orders placed by the electrical machinery and automobile industries fell sharply, showing "capital investment by export industries will likely drop ahead." Prime Minister Taro Aso on Thursday ordered the ruling coalition to compile an additional economic package as fears grow of a worsening global financial crisis. Despite a ballooning public debt, the ruling party's policy chief said the government may need to issue deficit-covering bonds to help finance the stimulus package. It would be a turnaround from fiscal discipline initiated by prime minister Junichiro Koizumi, who took office in 2001. Watanabe warned against loosening a grip on government spending. Politicians tend to advocate boosting public money with elections looming but "the short-term measures to prop the economy up would leave concerns over the long term" outlook, he said. The International Monetary Fund said Wednesday that Japan's economic downturn was expected to be longer and more severe than previously thought, slashing its forecasts for the world's second-largest economy. Japan's economy will grow by just 0.7 percent this year, down from a previous projection of 1.5 percent and much slower than last year's 2.1 percent expansion, the IMF said.