Japan feels currency pains

The strong yen has started eroding Japan's economy at last. Japanese core machinery orders fell in September for the first time in four months.

Japanese machinery orders fell for the first time in four months, a sign that companies are becoming reluctant about increasing spending as the nation's export-led recovery slows.

Factory orders, an indicator of capital spending in three to six months, fell 10.3 percent in September from the previous month, the Cabinet Office said today in Tokyo. The median forecast of 27 economists surveyed by Bloomberg News was for a 9.5 percent decline.

The report adds to evidence that the yen's surge to a 15- year high against the dollar and slowing global growth are weighing on corporate sentiment. Toyota Motor Corp. has revised upward its forecast for the yen rate while Nissan Motor Co. has pared its investment plans as the appreciation erodes profits.

"Corporate sentiment remains stagnant, so it will take time until fund demand and business investment pick up," Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA, said before the report released. "Companies will stay cautious about the outlook as the yen's appreciation would damp exports to the U.S. and Europe."

Orders rose 10.1 percent in August, the biggest gain this year. The yen traded at 82.28 per dollar as of 8:53 a.m. in Tokyo, compared with 82.26 before the report was released. The Japanese currency has still gained 4 percent since authorities tried to stem the yen’s advance by intervening in currency markets on Sept. 15.

Toyota, the world's largest carmaker, updated its estimate for the Japanese currency to 85 yen against the dollar from 90 yen for the year ending March 31. The yen climbed to 80.22 against the dollar on Nov. 1, the highest level since April 1995.

'Extremely Painful'

"If the yen stays at this level in the mid- to long-term, this is an extremely painful prospect," Toyota Executive Vice President Satoshi Ozawa said last week.

Nissan, Japan's third-largest automaker, said last week that the company expects the strong yen to cut its full-year operating profit by 185 billion yen. Nissan also plans 340 billion yen in capital spending for the year ending on March 31, smaller than its previous 360 billion yen forecast.

The Bank of Japan this week downgraded its economic assessment for a second month, saying that the recovery is "pausing" as exports and production cool. It held the overnight call rate target to between zero and 0.1 percent at its Nov. 4-5 meeting, which was brought forward by more than a week to speed up deciding details of its asset-purchase program.

The decline in orders in September would be a pull-back from the large jump in the previous month and machinery orders are still on a moderate recovery track, said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

"Although the level of orders remains low, companies are gradually increasing business investment as corporate profits are rebounding," Nishioka said before the report was released.

"Factory orders" in the sentence above means machinery orders excluding volatile ones from ship builders and electric power companies, which is widely watched by analysts as a leading indicator of capital investments.

Japanese industrial production has already fallen for the fourth straight month in September.

Japanese factory output fell for the fourth straight month in September, the longest streak of declines in more than a year, adding to signs the economy is losing momentum as slowing export growth and a strong yen bite.

Core consumer prices also marked their 19th straight month of annual declines in September and household spending fell from August, underscoring how sluggish consumption was keeping Japan mired in grinding deflation.

Industrial production fell 1.9 percent in September, data showed on Friday, more than a median market forecast of a 0.6 percent drop. That led the government to cut its assessment on output to say it is on a weakening trend.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to fall 3.6 percent in October but bounce up 1.7 percent in November.

"It's quite a weak number. Judging from this data, the economy is already entering a downturn. This shows the economy won't perform as good as the Bank of Japan predicted yesterday," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Most of the weakness could be explained by the expiration of government incentives for low-emission cars. But that doesn't change the fact factory output is weak. The Bank of Japan may need to do more to support the economy."

Japan's economy bounced back last year from its worst slump since the World War Two on the back of global recovery, but it has been losing steam in the past months, weighed down by a rising yen, softening global growth and weak spending at home.

The government cut its assessment of the economy in October, saying growth was stalling.

The Bank of Japan was somewhat more upbeat in its long-term outlook report issued on Thursday, sticking to its forecast that the economy will return to a moderate recovery path after a period of weakness. But it predicted a very slow exit from deflation in the coming years.

Analysts expect no significant upturn at least until early next year as the expiration of government subsidies for low emission cars is set to hit factory output.

The government is proposing an extra budget that offers help to job seekers and promotes subsidies for green technology, but economists have largely dismissed the chance this will provide an immediate boost to growth.

Core consumer prices fell 1.1 percent in September from a year earlier, roughly in line with a median forecast for a 1.0 percent decline and previous month's 1.0 percent drop.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, slid 1.5 percent in September from a year earlier.

Languid machinery orders are another sign that a strong currency is losing steam from the export-dependent country, in opposition to sanguine economic outlook by authorities. Japan's third quarter GDP is scheduled to be released on Monday next week, which analysts have forecast to grow by 0.6% from the previous quarter, underpinned in large part by government subsidies. But government support has already been done in September, which, coupled with a surging yen, would drag the economy into a negative growth in the present quarter.