Japan signals durable recovery as government pursues 'Abenomics'

Increase in core machinery orders in August provides welcome sign of rebound in capital spending as Abe pursues reflationary policies

PUBLISHED : Friday, 11 October, 2013, 12:00am
UPDATED : Friday, 11 October, 2013, 3:51am

Japan took another step towards solidifying its economic recovery in August when core machinery orders rose more quickly than expected, providing a welcome sign of the capital spending seen as vital for achieving sustainable growth.

The 5.4 per cent month-on-month rise in core orders, which exclude those for ships and power utilities, was the first gain in three months, data from the cabinet office showed yesterday. It also beat economists' median forecast of a 2 per cent increase.

The outcome is an encouraging sign for Japanese Prime Minister Shinzo Abe, who is hoping the positive mood generated by his reflationary policies, dubbed Abenomics, will lead to a virtuous cycle of higher capital spending and growth in wages and private consumption.

The government and the Bank of Japan see a recovery in capital spending as a key in driving a sustained economic recovery and breaking 15 years of grinding deflation, paving the way for the ultimate success of Abe's policies.

Growth so far this year suggests that the recovery in the world's third-largest economy is taking hold, although the jury is still out on whether capital spending is about to take a decisive turn for the better.

Second-quarter data released last month showed capital spending rose 1.3 per cent - the first increase in six quarters.

"The [machinery] data confirmed a recovery in capital spending led by non-manufacturers, reflecting effects from Abenomics," said Takeshi Minami, chief economist at the Norinchukin Research Institute in Tokyo.

Japan's economy expanded for the third consecutive quarter between April and June, outpacing other nations in the Group of Seven leading economies, with an annualised growth rate of 3.8 per cent, as the government's policies bolstered household spending and drove down the yen against the US dollar, benefiting exports.

Analysts expect companies to spend more on plants and equipment in the coming months as the Bank of Japan's key tankan survey showed earlier this month that confidence among big manufacturers was at its highest level in nearly six years in the third quarter.

For years, Japanese firms have been hoarding cash, instead of spending on plants and equipment or raising salaries, due in part to the view that the country would remain mired in deflation, bringing their total cash pile to about 220 trillion yen (HK$17.5 trillion).

Despite signs of a recovery in capital spending, firms remain reluctant to raise wages, even as Abe calls for increased salaries, casting doubt on the sustainability of the economic rebound.