Japan's private sector machinery orders (excluding volatile items) fell 0.6 percent on the month (seasonally adjusted) in May after dropping 9.1 percent in April, a fall slightly less pronounced fall than the consensus forecast for a decline of 0.9 percent. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. In original terms, machinery orders (excluding volatile items) rose 4.4 percent on the year in May after advancing 6.6 percent in April.

The smaller drop in headline growth in orders was driven by a rebound in non-manufacturing orders (excluding volatile items). These rose 1.8 percent on the month after falling 11.8 percent in April. Manufacturing orders fell at a more pronounced rate, down 1.8 percent after a previous decline of 0.6 percent. Within the manufacturing sector, growth in orders for iron and steel moderated, while there was a smaller decline in orders for automobiles, parts and accessories.

The slight dip in core orders was led by a pullback in orders for computers from some industries as well as those for engines from shipyards. They were partially offset by continued strong demand for computers from other industries, particularly from financial institutions, reflecting the need to digitizes and automate operations amid widespread labor shortages.

The Cabinet Office maintained its assessment after upgrading it in the November report, saying, Machinery orders are showing signs of a pickup. The official projection released in May called for a 2.1 percent slip in Q2 vs. a better-than-expected 3.9 percent rise in Q1. If core orders fall 4.4 percent on the month in June, they would hit the projection. If core orders rise 1.9 percent, they would be flat in Q2. Given the indicator's usual pattern of posing a rebound after a few months of drops, machinery orders may prove to be solid in the second quarter despite the drag from trade conflicts.

Key forecast points:
--Core machinery orders, the key indicator of business investment, 0.9% m/m (some expect a slight rebound) vs. -9.1% in April, which was the first drop in three months; +7.1% y/y for an eighth straight rise vs. +6.6% in April. The focus is on whether subcontractors of the auto, steel and other industries that are directly hit by 25% Trump tariffs are reporting slower orders.
--April-June orders may turn out to be firmer than the official projection of -2.1% q/q vs. a solid +3.9% in Q1.
--The Bank of Japan’s June quarter Tankan business survey showed that both large and smaller firms revised up their capex plans more than expected despite the uncertainty over global trade rows.

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.