Japanese machinery orders, the key leading indicator of business investment in equipment, chalked up a smaller-than-expected rebound on the month in June after slumping in May, backed by solid demand for computers among the financial and transport sectors amid a government-led digital transformation drive, data released Thursday by the Cabinet Office showed.

Core machinery orders marked their fourth straight decline from a year earlier while also slumping on the quarter in the April-June period, coming in much weaker than a solid gain projected by the government.

For fiscal 2023 that began in April, capital investment is generally supported by demand for automation amid labor shortages, digitization and emission control. Both large and small firms revised up their combined capex plans for the current fiscal year, the Bank of Japan's quarterly Tankan business survey for June released in July.

The Econoday Consensus Divergence Index stood at plus 6, just above zero, which indicates the Japanese economy is performing slightly better than expected after outperforming with a wider margin earlier. Excluding the impact of inflation, the index was at plus 5.

Japanese policymakers believe 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, rose 2.7 percent from the previous month on a seasonally adjusted basis to ¥854.0 billion in June after plunging 7.6 percent to ¥831.5 billion in May, which was the lowest amount since ¥825.2 billion in February 2022. These figures followed a 5.5 percent rise to ¥900.0 billion in April and a 3.9 percent drop to ¥852.9 billion in March. The increase in June was smaller than the median economist forecast of a 4.0 percent rise (forecasts ranged from a 1.1 percent drop to a 7.1 percent gain).

Core orders fell 3.2 percent on quarter in the April-June quarter, as largely expected and coming in much weaker than the official forecast of a 4.6 percent increase provided in May. It followed a 2.6 percent rebound in January-March and decreases of 4.7 percent in October-December and 1.6 percent in July-September and a 6.7 percent rise in April-June 2022.

The Cabinet Office projected that core orders would dip a further 2.6 percent in the July-September quarter, led by declines in orders from both the manufacturing and non-manufacturing sectors. This indicates business investment in equipment may remain sluggish in the third quarter after being flat in the second quarter GDP data released Tuesday. Japan's overall economic growth is expected to be supported by consumer spending on services in the July-September quarter.

Orders from manufacturers rose 1.6 percent on the month in June for the second straight increase after rising 3.2 percent, while those from non-manufacturers in the core measure rose 9.8 percent after plunging 19.4 percent the previous month.

The increase in core orders in June was led by demand for computers from the financial and insurance industries, transport and postal service companies as well as the telecommunications industry. In the manufacturing sector, there was demand for chemical equipment from non-ferrous metal and chemical product makers. In the April-June quarter, the decline was due to slower demand for computers from construction and telecommunications firms as well as lower orders for boilers and turbines from non-ferrous metal makers.

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

Core orders fell 5.8 percent from a year earlier in June after decreases of 8.7 percent in May, 5.9 percent in April and 3.5 percent in March and a 9.8 percent jump in February. It was smaller than the median economist forecast of a 6.9 percent drop. Forecasts ranged from 10.0 percent to 3.2 percent falls.

Japanese machinery orders, the key leading indicator of business investment in equipment, are forecast to have rebounded 4.0 percent on the month in June after slumping 7.6 percent in May, backed by the services sector, but core orders are expected to mark their fourth straight decline from a year earlier while also slumping on the quarter in the April-June period, coming in much weaker than a solid gain projected by the government. Core private-sector machinery orders, which exclude volatile orders from electric utilities and for ships, are expected to fall 6.9 percent on the year after falling 8.7 percent in May. 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.