Japan Machine Orders Drop 7.7% After Surging in July (Update2)

By Lily Nonomiya

Oct. 11 (Bloomberg) -- Japan's machinery orders fell in August after climbing at the fastest pace in almost four years in July.

Orders declined a seasonally adjusted 7.7 percent to 1.04 trillion yen ($8.9 billion) from the previous month, the Cabinet Office said in Tokyo today. The median estimate of 42 economists surveyed by Bloomberg News was for a 5.6 percent drop.

Today's report isn't cause for concern, analysts say, because the Bank of Japan's quarterly Tankan business survey last week showed companies plan to spend more on factories and equipment this year. Export growth accelerated in August, a separate report showed today, indicating the world's second- largest economy is withstanding a slowdown in the U.S.

``A drop in machinery orders is hardly a reason to be pessimistic about capital spending,'' Yoshiki Shinke, an economist at Dai-Ichi Life Research Institute in Tokyo, said before the figures were published. ``The Tankan survey showed that capital spending plans are pretty solid.''

The yen traded at 117.13 per dollar at 9:27 a.m. in Tokyo from 117.16 before the report was published. The yield on Japan's 10-year bond fell half a basis point to 1.72 percent.

The decline was led by electronic machinery, orders of which had surged in July, the Cabinet Office said. From a year earlier, machinery orders fell 2.6 percent in August.

Companies aim to increase spending 8.7 percent in the year ending March, the Tankan survey showed on Oct. 1, more than the 7.7 percent estimated in June. Outlays surged 10 percent last year, the biggest increase in more than a decade.

Higher Profits

Higher demand from Asia and Europe is fueling industrial production, which surged to a record in August. The Tankan report also showed large companies are increasing their profit and sales estimates for the fiscal year.

Asahi Glass Co. will spend at least 40 billion yen next year and in 2009 to expand output of glass used in liquid- crystal displays for flat-screen televisions, the company said last month.

Other figures today confirmed Japan's economy is picking up after shrinking an annualized 1.2 percent in the second quarter.

Export growth quickened to 14 percent in August from a year earlier, helping the current account surplus widen by 42 percent, the Finance Ministry said. Bank lending accelerated for a second month in September, a central bank report showed.

Interest Rates

Signs that the economy is withstanding slower U.S. growth may prompt the Bank of Japan to raise interest rates as soon as next month.

``All the data shows that the domestic economy is solid now and the bank should find that comforting,'' said Eishi Yokoyama, an economist at AIG Global Investment Corp. in Tokyo. ``We could see a rate increase in November.''

Bank of Japan Governor Toshihiko Fukui and his colleagues will conclude a two-day rate-setting meeting this afternoon in Tokyo. The board is expected to keep its key overnight lending rate unchanged at 0.5 percent, the lowest in the industrialized world, according to all 39 economists surveyed by Bloomberg News.

Last Updated: October 10, 2007 20:31 EDT