9 October 2002, 08:51  Japan's Machinery Orders Dropped 13.6% in August

/www.bloomberg.com/ By Daisuke Takato
(Bloomberg) -- Japanese companies cut orders for machinery by 13.6 percent in August, the biggest drop in five years, as slowing exports discouraged them from investing in equipment to make computer chips and other goods.
Machinery orders fell from a month earlier to 767.6 billion yen ($6.2 billion), the lowest in 15 years, a government report showed. The drop in orders, an early indicator of business investment, was the first in five months and exceeded economists' forecasts of a 0.6 percent decline.
``It was a huge shock,'' said Osamu Katano, an economist at Mizuho Securities Co. ``The economy will probably peak this quarter -- it may already have peaked.''
Companies such as semiconductor machinery maker Tokyo Electron Ltd. received fewer orders than expected as overseas demand for personal computers and chips used to make them slumped. That may undermine a recovery from the third recession in a decade in the world's second-largest economy.
Stocks pared gains after the report. The Nikkei 225 Stock Average was up 0.2 percent to 8708.90 at the 3 p.m. close of trading in Tokyo after rising as much as 1.3 percent.
From a year earlier, machinery orders fell 20.3 percent after falling 5.8 percent in July. Power utilities and shippers are excluded because their large projects skew the figures.
Machinery orders may fall further as companies such as Toyota Motor Corp., Matsushita Electric Industrial Co. and other manufacturers cut off suppliers of equipment and move production overseas to reduce costs.
``There's still pessimism about a recovery in the machinery sector,'' said Hisako Furuta, who helps manage 4.5 billion yen at ING Mutual Funds Management Co. ``We are still not in an environment where we can expect to see a pickup in capital spending anytime soon.''
Exports Fall
Exports accounted for half of Japan's 0.6 percent economic expansion in the second quarter, the first in more than a year. Overseas shipments fell for a third month in August, suggesting that the recovery may not last.
The economy may start to shrink as soon as November, a report yesterday showed. Japan's index of leading economic indicators fell below the 50 percent level for the first time in eight months, indicating a contraction in three to six months.
A faltering economy may force Prime Minister Junichiro Koizumi to approve extra spending before the fiscal year ends on March 31 to create new jobs, analysts said. That would ease some of the pain likely to result from plans to speed write-offs of $430 billion in banks' bad loans, analysts said.
``Of course there will be a supplementary budget -- and the sooner the better,'' said Paul Sheard, chief economist at Lehman Brothers Japan Ltd. Koizumi needs to ``tell companies there is going to be more deregulation, and the government is going to nurse the economy through, so you don't have to cut back on capital spending.''
Pessimism
Executives at large manufacturers are curbing investment plans as they remain pessimistic about the economy, according to the Bank of Japan's quarterly Tankan survey of business confidence.
Large manufacturers were pessimistic for the seventh straight quarter and will cut business spending 9.2 percent in the fiscal year ending March 31, Japan's most widely watched index of sentiment showed last week.
Machinery orders by private companies, not including utilities and shippers, are a key barometer of business spending, because they point to purchases three to six months ahead.
Machinery orders account for about two-thirds of business spending, which drove Japan's last economic expansion from February 1999 to October 2000. Capital spending accounts for about 16 percent of the economy.
Moving Plants
Tokyo Electron, the world's second-biggest semiconductor- equipment maker, received fewer orders in the second quarter than forecast.
Orders will be ``slightly less than 100 billion yen,'' Chief Executive Tetsuro Higashi said today. The company said in August that orders would fall by a fifth to 100 billion yen in the July- September period from 127 billion yen in the previous quarter.
As growth falters, Toyota is moving plants to Mexico, Canada and Thailand to tap lower costs. The country's largest automaker said last month it would spend $140 million to build a factory in Mexico, and another $342.5 million in Thailand. That's money that's not being invested in Japan.
Matsushita Electric, the world's biggest consumer-electronics maker, will halve the number of its suppliers to cut costs by 14 percent after a record net loss last year. The Osaka-based company will save 300 billion yen by trimming the number of its materials suppliers.
Such cost cuts mean less business for companies such as Nitto Kohki Co., which lowered its profit forecast yesterday on slumping demand for its industrial equipment. The Tokyo-based company slashed its profit forecast for the year ending March 31 by 29 percent to 1.07 billion.

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