Tokyo, May 11 (Bloomberg) -- Japanese companies cut orders for machinery inMarch, capping the worst quarter in almost two years and suggesting thatcapital spending is drying up as a source of economic growth. Core machinery orders by private companies, excluding shipbuilders andelectric power companies, fell 3.6 percent from February, seasonally adjusted,the government's Economic and Social Research Institute said. Economistshad expected a 5 percent decrease. From a year earlier, orders rose 3.7percent. Machinery orders, the most widely watched monthly indicator of capitalspending, point to investment in about six to nine months' time. Companies areresponding to falling overseas demand by cutting production, which meansthey'll need less equipment. ``This clearly points to a sharp contraction in fixed business investment, whichis likely to drag GDP growth into negative territory in the second quarter,'' saidJames Malcolm, a senior economist at J.P. Morgan Securities (Asia) Ltd. The economy will probably grow 0.1 percent this quarter, according to themedian of forecasts in the latest Bloomberg News survey. Orders by manufacturers fell 1.8 percent, led by chemical makers. Orders byother companies fell 8.9 percent, led by transport companies. In the three months ended March 31, orders dropped 7 percent from theprevious quarter, snapping a record six-quarter growth streak. The Economicand Social Research Institute expected a 6.4 percent decline. It expects ordersto rise just 0.4 percent this quarter.
More Downgrades
The institute downgraded its assessment of machinery orders, and said slowingorders may pull down capital investment, which accounts for about 16 percentof the economy. ``At this stage, machinery orders are in a weakening trend,'' said YoshihikoSenoo, the institute's head of statistics. ``According to machinery orders,there's a possibility that capital expenditure will weaken from the end of theyear.'' Hopes for a recovery next year hinge on a rebound in the U.S. economy and inconsumer spending at home, Senoo said. ``If the U.S. economy deteriorates more than expected, then Japanese policymakers will probably have to focus more on steps to shore up growth, ratherthan pushing through painful structural reform,'' said Mamoru Yamazaki, chiefeconomist at Barclays Capital Japan Ltd. Prime Minister Junichiro Koizumi, who took office last month, pledged in hisopening address to the parliament to clean up banks' bad debt and rein ingovernment debt. Other officials, including Liberal Democratic Party policy chief Taro Aso, havesaid the government has to keep the economy growing. Core machinery orders are the most closely watched because they excludeorders from shipbuilders and electric power companies, which are volatile andcan skew the data.