Japan's machine orders point to soft external demand

Chris Scicluna

Gradual moderation of goods price pressures evident in Japan’s March PPI data
According to today’s Japanese corporate goods price data from the BoJ, cost pressures in the manufacturing sector eased a little further in March. In particular, having dropped in each of the previous two months, the producer price index was unchanged last month. As a result, the annual rate of goods PPI inflation slowed for a third successive month and by 1.1ppts to 7.2%Y/Y, 3.4ppts below December’s peak and the softest rate since September 2021.

Within the detail, with price rises often minimal or absent altogether, the annual inflation rates of a range of items slowed 1.0ppt or more in March, from food and beverages (7.0%Y/Y) to chemicals (3.4%Y/Y), plastics (7.8%Y/Y) and nonferrous metals (1.9%Y/Y). In the capital goods sector, inflation of production machinery (down 0.7ppt to 3.7%Y/Y), business oriented machinery (down 0.4ppt to 1.1%Y/Y) and electrical machinery and equipment (down 0.4ppt to 6.0%Y/Y) also slowed from lower levels, as did transport equipment (down 0.5ppt to 4.2%Y/Y) and electronic parts and devices (down 0.5ppt to 2.3%Y/Y). Moreover, as prices of electricity, gas and water fell for a second successive month, utilities inflation slowed almost 7ppts to 26.8%Y/Y.

The main exceptions in March to the picture of moderating cost pressures included prices of petroleum and coal, which rose 2.0%M/M, although these were still down 3.2%Y/Y. And producer prices of textiles rose 2.6%M/M to push the respective annual rate up 1.3ppts to a new high of 7.6%Y/Y.

BoJ survey flags Japanese consumer concerns about inflation
While today’s price data reported a softening of cost pressures in the goods sector, the BoJ’s quarterly consumer survey reported increased concerns about inflation. In particular, a net balance of more than 50% of survey respondents judged that both economic conditions and their own circumstances had deteriorated over the past year, with the net share stating that they were worse off up for a sixth successive quarter. A net balance of more than 60% - up more than 10ppts on the quarter – judged that prices had gone up “significantly” over the past year. Looking ahead, about one third expect prices again to rise “significantly” over the coming year, and more than half expect them to rise “slightly”, with 87.4% judging such price rises to be “unfavourable”.

Indeed, consistent with fears that inflation persistence will undermine consumer confidence and weigh on spending over coming quarters, a net balance of 27.2% of responding households think the economic outlook will worsen over the coming year and a net balance of 23.7% (admittedly down more than 6ppts on the quarter) expect their incomes and spending to fall over the coming year. Moreover, inflation is judged by more than 70% of survey respondents – the most for any criterion – to be the most important factor in driving spending decisions over the coming year.

Machinery orders data point to positive Japanese domestic capex growth in Q2
At face value, the latest Japanese machinery orders might have looked disappointing. Total orders dropped 0.8%M/M in February following a decline of 10.2%M/M in January, leaving the average for the first two months of the year down 7.7% from the Q4 average. However, that weak trend principally reflects soft overseas demand for machinery, which was trending almost 19% below the Q4 level in January and February. In contrast, domestic private sector orders rose 3.1%M/M in February following growth of 12.0%M/M in January to be trending 9.0% above the Q4 average. And while that was flattered by volatile items, excluding which they fell 4.5%M/M in the latest month, core private sector orders were still on average up a respectable 4.7% in January and February relative to Q4, pointing to the likelihood of positive domestic capex growth this quarter.

Of course, the orders data are typically extremely volatile. Thanks to a one-off surge in demand from nonferrous metals producers, orders from the manufacturing sector rose 10.2%M/M in February following a drop of 2.6%M/M in January. And as demand from construction firms more than halved after temporarily all-but-doubling in January, orders from the non-manufacturing sector dropped a seemingly steep 14.7%M/M following a surge of 19.5%M/M in January. Looking through the month-to-month volatility, however, orders from manufacturers were trending 1.1% above the Q4 level while those from non-manufacturers (excluding ships) were trending almost 14% above the Q4 level, with firm growth in electricity supply and telecoms in particular.

Looking ahead, the tight labour market, digitisation, green transition, and supply-chain strengthening all point to the likelihood of steady growth in Japanese domestic fixed investment over coming quarters, as long as the global demand environment doesn’t darken too much.

European central bankers, including BoE Governor Bailey, to speak publicly
In Europe, it’s set to be a quiet day ahead for economic news, with no top-tier data due for release from either the euro area or UK. There are, however, a number of central bankers set to speak publicly, with BoE Governor Bailey most notably set to be in action twice, on both occasions speaking on issues related to financial stability that might have an impact on the outlook for monetary policy too. ECB Vice President Luis de Guindos, and French and Spanish Governors Villeroy and de Cos, are also due to speak publicly today.

US CPI data and Fed minutes most likely to move markets today
All eyes, of course, will be on the US CPI report for March, arguably the week’s (or indeed month’s) most important release. Reflecting developments in wholesale markets, pressure on food prices in the US has eased recently, and the rise in energy prices should be relatively modest. But while core goods prices have moderated, broad pressure in service prices suggests another non-negligible increase in the core CPI component. Larry Werther at Daiwa America forecasts increases of 0.4%M/M in both headline and core prices, the latter of which would be broadly in line with the 6-month and 12-month averages but could also push the annual core rate up 0.1ppt to 5.6%Y/Y. Meanwhile, US federal budget data, also for March, are likely to report significant deterioration from a year earlier.

The minutes of the March FOMC meeting – which brought a further 25bps rate hike despite the sudden outbreak of banking sector turbulence – will also be closely watched today. While that meeting brought publication of the FOMC’s economic projections and dot-plot, issues meriting closer attention in the minutes include the Committee’s assessment of the possible extent of credit tightening to come, and the impact that might have on the outlook for economic activity, jobs and inflation. 

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.