Japanese machinery orders, the key leading indicator of business investment in equipment, came in much weaker than expected, posting a sharp drop on the month in May after a rebound in April, as recent solid demand for computers among the financial and transport sectors saw a pullback, offsetting a slight uptick in orders for engines and chemical equipment from manufacturers, data released Wednesday by the Cabinet Office showed.

For fiscal 2023 that began in April, capital investment is generally supported by demand for automation amid labor shortages in some sectors as well as government-led digital transformation and emission control. Both large and small firms revised up their combined plans for investment in equipment for the current fiscal year, the Bank of Japan's quarterly Tankan business survey for June released this month showed.

The Econoday Consensus Divergence Index stood at minus 38, well below zero, which indicates the Japanese economy is performing worse than expected after outperforming earlier. Excluding the impact of inflation, the index was at minus 44.

Japanese policymakers have said the economy needs continued monetary easing and fiscal spending to support a full recovery from the pandemic-caused slump and guide inflation to stable 2 percent with sustainable wage growth.

Core private-sector machinery orders, which exclude volatile orders from electric utilities and for ships, slumped 7.6 percent from the previous month on a seasonally adjusted basis to ¥831.5 billion in May after rebounding 5.5 percent to ¥900.0 billion in April and falling 3.9 percent to ¥852.9 billion in March. It was much weaker than the median economist forecast of a 1.0 percent rise (forecasts ranged from a 3.0 percent drop to a 2.1 percent gain). The amount in January was the largest since ¥948.8 billion in July 2022.

Orders from manufacturers rose 3.2 percent on the month in May after falling 3.0 percent in April while those from non-manufacturers in the core measure plunged 19.4 percent after surging 11.0 percent the previous month.

The Cabinet Office maintained its assessment after downgrading it in January for November data, saying,"Machinery orders are pausing." The three-month moving average dropped 2.1 percent in the March-May period after falling 1.1 percent in February-April and rising 0.2 percent in January-March.

Core orders fell 8.7 percent from a year earlier in May after decreases of 5.9 percent in April and 3.5 percent in March and surging 9.8 percent in February. It was well below the median economist forecast of a slight 0.1 percent rise. Forecasts ranged from a 3.9 percent drop to a 1.6 percent gain.

Japanese machinery orders, the key leading indicator of business investment in equipment, is forecast to have posted a second straight rise on the month in May, up 1.0 percent, after rising 5.5 percent rise in April and marking two months of decline. Demand from the non-manufacturing sector remains solid after the government eased its Covid public health rules widely at the end of April while slowing global growth has damped orders from manufacturers.

Core private-sector machinery orders, which exclude volatile orders from electric utilities and for ships, are expected to be nearly flat on the year, up just 0.1 percent, after falling 7.0 percent in April and 3.5 percent in March. Last month, the Cabinet Office maintained its assessment, saying,"Machinery orders are pausing."

Machine Orders are the total value of new private-sector purchase orders placed with manufacturers for machines excluding volatile items such as ships and utilities. It is a leading indicator of production. Analysts consider the data an indicator of capital spending. Rising purchase orders signal that manufacturers will increase activity as they work to fill the orders.

It is a leading indicator of production. Rising purchase orders signal that manufacturers will increase activity as they work to fill the orders. The importance of machinery orders cannot be overstated given the economy's dependence on exports. The purpose of these data is to get a picture of machinery manufacturers' order books and to collect basic material for analyzing the direction of the economy through an early understanding of trends in capital investment in machinery.