TOKYO: Japan’s core machinery orders posted their biggest monthly fall in nearly two years in February, official data showed yesterday, dragged down by a steep drop in demand from IT and other service firms to extend their decline into a second month.

       The data added to concerns that Japanese firms are holding off on investments due to rising energy and raw materials costs, fuelling fears about the pace of economic growth as the world’s third-largest economy tries to recover to pre-pandemic levels.

       “Companies are worried about surging costs due to raw material price inflation that could damage profits.

       “The risk of capital expenditure slowdown ahead is huge,” said Kota Suzuki, economist at Daiwa Securities.

       Core machinery orders, a highly volatile leading indicator of capital spending in the coming six to nine months, fell 9.8% in February from the previous month, the Cabinet Office data showed yesterday, the biggest drop since April 2020.

       It was far larger than a fall of 1.5% forecast by economists in a Reuters poll and January’s 2.0% decrease, and prompted the government to downgrade its assessment of machinery orders, saying a recovery was stalling.

       Core orders from non-manufacturers excluding ships and electrical utilities fell 14.4% in February, led by a 36.9% fall in orders from information technology service firms, the biggest drop since January 2006.

       “The information service sector has been aggressive in buying computers for IT systems and data centre facilities since last October, and the movement appears to have stalled,” a government official told a media briefing.

       “It was a surprising, mixed result that highlighted weakness across non-manufacturers,” said Yasunari Ueno, chief market economist at Mizuho Securities, who also noted weak demand from the transport and financial sectors.

       Orders from manufacturers fell 1.8%, hurt by soft demand from chemicals and other material industries. Orders from electric machinery firms grew 13.8% as they ramped up investments in semiconductor-making equipment.

       On a year-on-year basis, core orders rose 4.3% in February, the data showed, much weaker than a 14.5% rise expected by economists.

       “In March and beyond, companies could turn more cautious and reduce machinery orders on the Ukraine crisis-caused slowdown in the global economy and commodity rally,” said Koya Miyamae, senior economist at SMBC Nikko Securities.

       Rattled by supply disruptions and soaring production costs, Japanese business confidence worsened in the first quarter for the first time in nearly two years, a Bank of Japan (BoJ) survey showed this month.

       Managers of major Japanese firms expected the near-term recovery outlook to stay modest at best, on uncertainties such as the Ukraine crisis and its impact on commodity inflation, a Reuters poll showed yesterday.

       Economists have cut projections for Japan’s growth, in view of the heightening inflationary pressures on households and businesses.

       “The rebound in April-June consumption may not be as strong as expected on rising energy and food prices,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Companies, too, could limit spending.”

       Meanwhile, Japanese manufacturers’ business confidence improved for a second month in April as material industries remained resilient in the face of the Ukraine crisis, although production cuts dampened automakers’ optimism, the Reuters Tankan poll showed.

       The service sector index rebounded strongly to a three-month high after Covid-19 curbs were eased late last month, although managers in the poll expected a slower recovery ahead, citing inflationary pressures.

       While the readings were up from the month before, Japanese firms remained wary of fresh risks to their recovery plans, according to the March 30 - April 8 poll, which tracks the BoJ’s closely watched “tankan” quarterly survey.

       “In addition to the coronavirus, the trends in foreign exchange and raw material prices following the Ukraine crisis have clouded our outlook,” said a chemical company manager in the poll of 499 big and mid-sized companies, of which 246 responded.

       The Reuters Tankan manufacturers’ sentiment index advanced to plus 11 in April from plus eight in the previous month.

       The service-sector index rose for the first time in three months to plus eight, from the prior month’s minus one.

       Both the manufacturing and service-sector sentiment indexes in the Reuters poll were slightly below the latest results of the BoJ’s own tankan survey released on April 1.

       In the Reuters poll, sub-indexes for manufacturers closer to raw materials such as oil refinery and ceramics, textiles, paper and steel and nonferrous metals posted double-digit increases, with some citing robust global chip demand as a tailwind.

       “Strong semiconductor-related business is leading our company-wide performance,” said a ceramics company manager.

       By contrast, the sub-index for autos and transport equipment makers dropped from minus 14 to minus 36 in April, the lowest since September 2020. Readings for electric machinery and chemicals also marked double-digit declines.

       In March, Japan’s biggest carmakers including Toyota Motor Corp announced production cuts at domestic plants due to parts shortages and irregular disruptions such as a cyberattack and an earthquake.

       Auto industry managers in the poll expressed concerns over production cuts as well as a wide variety of newly emerging risks.

       “Orders remain low due to the Ukraine situation, a weak yen and Covid-19, while raw material and shipping costs are rising,” said a manager at a transport equipment maker. — Reuters