Chief economist update: Japan's core strengthens

When Japan's Cabinet Office revised it GDP growth estimate higher from the preliminary estimate of 0.5% to 0.7% in the June quarter, it also reported that capital expenditure provided the highest contribution to growth (0.5 percentage points) over the same period.

Latest data on core machinery orders - a leading indicator of capex six to nine months ahead - indicate continued expansion in business investment in the coming months.

The Cabinet Office reports that core machinery orders rebounded sharply by 11.0% in July following an 8.8% slump in the previous month. This is much higher than market expectations for a gain of 5.6% and takes the annual growth rate in core machinery orders up to 13.9% -- the fastest rate in 38 months.

Manufacturing orders jumped by 11.8% in the month of July following a 15.9% drop in the previous month while non-manufacturing orders (excluding volatile orders) increased by 10.9%, more than reversing the 7.0% decline recorded in June.

However, as the chart below shows, data on core machinery orders are volatile and monthly stats should be taken with a pinch of salt.

The good news is that, abstracting from the monthly volatility, the annual rate of change in core machinery orders had clearly been trending higher since the start of 2018.

Read more: core machinery ordersCabinet OfficeJapanManufacturingGDP
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