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Japan Industrial Sector Shows Signs of Slowdown Amid Weaker Investment Plans

© AFP 2023 / Kazuhiro NogiThe Japanese national flag is seen at a cargo terminal area of Tokyo port on June 8, 2016. Japan's economy expanded at a slightly faster pace than first thought, revised figures showed June 8, knocking hopes that the central bank will unleash fresh stimulus this month.
The Japanese national flag is seen at a cargo terminal area of Tokyo port on June 8, 2016. Japan's economy expanded at a slightly faster pace than first thought, revised figures showed June 8, knocking hopes that the central bank will unleash fresh stimulus this month. - Sputnik International
Japan's industrial sector continues to slow down in the face of international headwinds and a cooling domestic demand, while the cabinet of Prime Minister Shinzo Abe is seeking new ways to support the fading economic momentum.

Kristian Rouz — A new report by the Japanese government finds the island nation's industrial equipment orders fell in January due to rising concerns over international trade tensions. Overseas headwinds have also affected spending plans of Japanese corporations, contributing to the lowered growth expectations in the near-term.

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According to Japan's Cabinet Office Wednesday, machinery orders dropped 5.4 percent in January from the previous month, far exceeding earlier expectations of a 1.7-percent decline. The slump comes after a negligible 0.3-percent month-on-month drop in December, and points to possible declining capital expenditures of Japanese manufacturers.

Economists say Japanese manufacturers are wary of possible US tariffs on the imports of cars and telecom equipment. This comes despite Japan and the US gradually advancing talks on a potential free trade agreement that could see an increase in US exports to the island nation.

Additionally, lingering tensions in US-Chinese trade relations have likely contributed to the cooling in Japan's industrial sector.

"There is confusion about the status of US-China trade negotiations. This could make Japanese companies more pessimistic, which is a risk for capital expenditure plans in the new fiscal year", Shuji Tonouchi of Mitsubishi UFJ Morgan Stanley Securities said.

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This latest data comes as the Japanese government is debating ways to support economic growth in the country amid the complexity of domestic and overseas challenges. The cabinet of Shinzo Abe has planned another hike in sales tax, but some experts warn this could be an ill-informed decision in the current macroeconomic conditions.

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Former Economy Minister Heizo Takenaka said in a recent interview a sales tax hike could trigger a recession, which Japan narrowly avoided last year. The former official believes higher prices could squeeze consumer spending, thus slashing percentage points off the broader GDP growth rate.

Takenaka said the Abe cabinet should first introduce spending reforms, which could improve the efficiency of governmental investment and Tokyo's broader economic stimulus. This could spur GDP growth, and that's when the planned hike in sales tax should come in, the former minister said.

"Japan shouldn't be raising its sales tax when the 2 percent inflation goal hasn't been reached, and Japan hasn't completely escaped from deflation", Takenaka, who currently is a professor at Toyo University, said. "I don't think the prime minister wants to do it either".

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Meanwhile, private sector investment is expected to slow this year, as the majority of institutional and private investors, along with manufacturing companies themselves, don't see too much room to grow in the face of mounting risks.

The Japanese government also observed an alarming 18.1-percent drop in overseas demand for industrial equipment this past January. Officials say the cooling global economy and disruptions in supply chains could be the driving factors behind the slump.

"It's fair to say the outlook for capital expenditure in Japan is not bright", Mitsubishi's Tonouchi said.

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However, equipment orders from manufacturers themselves only dropped 1.9 percent in January compared to a revised 4.4-percent decline the previous month. This might suggest it's not all doom and gloom in the Japanese manufacturing sector.

Meanwhile, the Bank of Japan (BOJ) is set to announce further policy decisions after a two-day meeting on Friday. Central bankers have previously said Japan's negative interest rates regime (NIRP) will likely remain in place, despite calls from commercial banks to normalise monetary conditions in the country.

"The BOJ said it will achieve 2 percent inflation in two years. But six years have passed", Takashige Shibato of the Regional Banks Association of Japan said. "The policy has provided sufficient benefits to the economy. On the other hand, various side-effects are emerging in areas like financial intermediation and bond market functions. We hope the BOJ takes these into account".

The BOJ is expected to highlight overseas challenges to the pace of Japan's economic expansion, and reiterate its commitment to supporting the economy with liquidity injections and ultra-low borrowing costs.


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