Japan Machine Orders, Producer Prices Fall as Firms Cut Costs
Orders for Japanese machinery fell to a 22-year low and producer prices tumbled the most since 1987 as dwindling profits forced companies to cut costs amid the worst postwar recession.
Bookings, an indicator of capital investment in the next three to six months, fell 5.4 percent to 688.8 billion yen ($7.1 billion) in April, the lowest since 1987, the Cabinet Office said today in Tokyo. Wholesale prices, the costs companies pay for energy and raw materials, slid 5.4 percent in May from a year earlier, the Bank of Japan said.
The collapse in global demand has forced manufacturers to cut production by more than a third from last year’s peak. Companies aren’t ready to start spending again as plunging profits force them to cut workers and salaries, damping the prospect of a rebound in the world’s second-largest economy.
“Companies aren’t willing to increase investment because the recovery in demand is slow,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The economy will probably return to growth this quarter, but it may be temporary because capital investment and consumer spending are slow to recover.”
The yen traded at 97.53 per dollar at 11:30 a.m. in Tokyo from 97.46 before the reports were published. Shares of machinery makers were mixed, with Fanuc Ltd. and Advantest Corp. declining, while Tokyo Electron Ltd. advanced. The Nikkei 225 Stock Average rose 1 percent to 9,885.13 at the morning close in Tokyo.
Demand in China
Reports released in the past month suggest gross domestic product may grow this quarter, after plummeting at a record 15.2 percent pace in the first three months of the year. Japan’s manufacturers have gotten a lift from revived demand in China, where the government is spending $586 billion on roads, hospitals and low-cost housing. Exports and production rose in March and April on a month-on-month basis.
Still, only about half the nation’s factory capacity is being used, putting pressure on managers to cut costs and delay investments.
A survey published this week by the Nikkei newspaper showed that Japanese companies plan to cut capital spending by an unprecedented 15 approved payday advance.9 percent this business year. The previous record was an 11.8 percent decline that came in 1993 when the bursting of Japan’s asset bubble left companies saddled with plant and equipment they no longer needed.
Output Decline
Jet-engine maker IHI Corp. said last week order delays from airlines have forced the company to slash production of parts for Airbus SAS and Boeing Co. The Tokyo-based company, which forecasts output will fall this year by 20 percent from 2007 levels, says it will delay investments in production capacity for as long as four years.
Postponed investments and a weak global demand are causing prices to fall and some economists say the economy has already slipped into deflation.
“Though we are recently seeing some signs of an economic recovery, we should assume price declines will worsen in coming months,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “Japan is already in deflation.”
Expectations of lower prices ahead may prompt companies and consumers to delay purchases, eroding profits and forcing firms to cut wages. Consumer prices excluding fresh food, the central bank’s key gauge of inflation, fell for a second month in April.
Toyota Motor Corp. estimates it will sell only 7.3 million vehicles this year, less than the 10 million it has the capacity to build. The company, expecting its second year of losses, will cut capital spending this year by 36 percent, according to the Nikkei.
Cost Cuts
Cost cuts by Toyota and other companies including television-maker Sharp Corp., which is closing older factories that produce screens for mobile phones, may limit the scope of Japan’s rebound, according to former Economic and Fiscal Policy Minister Hiroko Ota.
“More layoff and investment cuts could mean the economy falls back into negative growth,” Ota said last week.