Japan machinery orders seen as bullish

TOKYO (Reuters) – Japan's core machinery orders fell in May, pulling back from the previous month's big gain, but the decline was expected, easing some concerns about a slowdown in capital spending amid a worsening US-China trade conflict .

Capital expenditure is A bright spot in Japan's economy, which suffered a first-quarter contraction after its long run after the bubble economy of the 1980s.Economists are watching capital spending closely for clues on the strength of an expected economic rebound in the second quarter.

Cabinet Office data shows a 6.3 percent drop in the size of the budget, the average value is 3.7 percent, smaller than the economists' median estimate of a 5.5 percent drop.

It followed a 10.1 percent rise in April.

The data came to a week after the Bank of Japan's key tankan survey showed big firms planned to raise capital spending by a solid 13.6 percent this fiscal year, even as manufacturers' business confidence soured for two straight quarters in June.

"said Koya Miyamae, senior economist at SMBC Nikko Securities. "Core orders look to grow for a fourth straight quarter in April-June." Economists expect capital expenditure to be increased by the need to upgrade production capacity, boost software, invest in labor-saving equipment to cope with labor shortages and to meet Tokyo Olympic Games.

Still, policymakers and analysts are carefully watching how trade disputes between the United States and China – Japan's two major export destinations – may affect corporate capital spending plans in an export-linking economy.

U.S. tariffs on $ 34 trillion (£ 25.6 trillion) in Chinese imports took effect on Friday. Beijing responded with its own measures.

The Trump administration raised the stakes in its trade with China on Tuesday, saying it would slap 10 percent over $ 200 billion worth of Chinese imports.

By sector, order by manufacturer rose 1.3 percent in May, while service-sector orders increased 0.2 percent.

The Cabinet Office kept its assessment of machinery orders unchanged to say they are picking up.

Compared with a year earlier, core orders, which excludes those for shipping and electricity utilities, rose 16.5 percent in May, versus an 8.6 percent gain seen by economists.

The Bank of Japan's longest-in-the-money plan to increase capital expenditure by 17.9 percent this fiscal year, the fastest gain since 2015.

Large non-manufacturers plan to raise capex by 11.2 percent, which would be the fastest increase since 1990 at the peak of the bubble economy.

The central bank will vote the orders and other data at its end July 31, at which its nine-member board will conduct a quarterly review of its long-term growth and inflation outlook.