–May Machinery Orders Set for Pullback after April Surge but Strong Demand for Computers, AI-Linked Equipment Seen Intact
By Max Sato
(MaceNews) – Bank of Japan policymakers have received evidence this month that the domestic economy has been resilient, overcoming high fuel costs and material shortages triggered by the Middle East conflict amid the global artificial intelligence boom and solid nominal wage growth.
The bank’s board made it clear that it will continue to raise rates after it decided in a majority vote in June to raise the target of the overnight interest rate by 25 basis points (0.25 percentage point) to 1%.
To ease market jitters, BOJ officials have also repeated that they will react swiftly to a rapid rise in long-term rates by raising purchases of Japanese government bonds and conducting fixed-rate JGB purchase operations among other tools. They have been gradually reducing asset purchases as part of the policy normalization process.
Many economists and market participants expect the BOJ to conduct its sixth rate hike in the current cycle by the end of the year, possibly at the Dec. 17-18 meeting, when board members may be able to see early indications of whether large firms will continue raising wages at the recent pace of about 5% in fiscal 2027 starting in April. Some BOJ watchers are calling for a rate hike at the Oct. 29-30 meeting when the board updates its medium-term growth and inflation projections as well as risk analysis in the quarterly Outlook Report but others argue that BOJ officials may need more time to assess the impact of the Mideast conflict as the fate of the latest U.S.-Iran ceasefire deal remains uncertain.
In the BOJ’s quarterly report on regional economies released on July 9, all nine regions in Japan described their economies as either recovering moderately, picking up or picking up moderately while five regions continued to note that there were some soft spots.
BOJ branch managers reported that supply disruptions and material shortages caused by the Iran war exerted downward pressures on exports and production but many of them noted that the likelihood of a significant decline had decreased compared to an earlier stage of the conflict as Japan had secured, at least temporarily, alternative supply sources and transportation routes bypassing the Gulf.
On the upside, the report showed that the global artificial intelligence boom had boosted orders for semiconductor-producing equipment and electronic components and that AI-related demand was also spreading to power and power supply equipment, telecommunications equipment and molds among other areas.
As department store sales data have shown in recent months, branch managers pointed to robust spending on high-end goods by affluent domestic consumers in urban areas who are benefiting on rising stock prices. Solid wage hikes by large firms, averaging 5% for the third consecutive year (high for Japan), have also supported the tourism, accommodations and food and beverage sectors.
Sales of air conditioners and automobiles are growing in response to regulatory and tax changes while the government’s on-and-off fuel and utility subsidies are alleviating the impact of high energy costs. But the report also said against the backdrop of cautious spending patterns among many households, supermarkets and other retailers have seen sales of certain goods drop when they mark up their prices.
Branch managers reported that companies in the materials sector continued to pass rising labor and supply costs on to their selling prices while suppliers of food and daily necessities are considering whether to raise their prices, citing the Middle East situation. The timing of such markups is likely to be in the summer (usually from July to September). Small businesses told branch managers that they had failed to fully reflect rising procurement costs in sales prices, which in turn is depressing their profits.
The latest BOJ data showed that producer inflation in Japan continued to accelerate to 7.1% in June from upwardly revised gains of 6.6% in May and 5.4% in April as fuel costs rose further to reflect an earlier spike in crude oil prices and global memory chip shortages pushed up the prices for computers and other electronic goods. The weak yen also kept imports expensive. Crude oil prices slipped to around pre-Iran war levels in June on expectations that Washington and Iran would follow up on their ceasefire agreement but it takes some time before it filters through to product prices.
In the coming week, machinery orders for May are widely expected to slip back after surging in April but the trend for the key indicator of capital investment is likely to confirm that there are strong business investment intensions despite the lingering Mideast conflict.
Data released on July 1 showed the Bank of Japan’s quarterly Tankan business sentiment survey recorded an unexpected improvement among many large manufacturers in the June quarter as the positive impact of solid export demand for production machinery and computer chips appeared to have reduced the drag from high producer prices caused by an earlier spike in global crude oil prices and domestic naphtha shortages.
Non-ferrous metals producers saw their confidence unexpectedly jump from the March quarter while the auto industry sentiment slipped only slightly, indicating that those sectors have weathered the negative impact of stiff import duties slapped by the Trump administration last year.
Despite uncertainty generated by the Mideast conflict, large firms revised up their combined plans to increase investment in equipment by 11.5% for fiscal 2026 ending next March, up from the 3.3% rise projected in March. This seems to reflect widespread labor shortages and strong global needs to build artificial intelligence data centers. Smaller firms turned slightly more cautious by forecasting an 8.3% drop in their combined capex plans, down from the 8.1% fall projected three months earlier.
Among other key surveys closely monitored by BOJ officials, the monthly Economy Watchers Survey, which was conducted by the Cabinet Office from June 25 to June 30 and released on July 8, indicated that confidence continued to improve, thanks to easing in Mideast tensions as well as robust spending by visitors from overseas taking advantage of the weak yen and by affluent domestic consumers amid rising stock prices. There is also solid demand for semiconductors and air conditioners.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate rose slightly to a four-month high of 44.0 in June on a seasonally adjusted basis, posting the second straight rise after rising to 43.6 in May from 40.8% in April. Before the impact of the Iran war emerged, the index climbed to a nearly two-year high of 48.9 in February from 47.6 in January. The last time the index was above the neutral line of 50 was in March 2024, when it was at 50.1.
The Watchers’ outlook index, which shows sentiment in two to three months, marked the third straight increase, rising to 45.7 in June from 40.7 in May and 39.4 in April. The index started the year at 50.1 before slipping to 50.0 in February and plunging to 38.7 in March.
Wednesday, July 15
0850 JST (2350 GMT/1950 EDT Tuesday, July 14) The Cabinet Office releases May machinery orders.
Mace News median: core orders -5.0% m/m (range: -6.5% to -0.7%) vs. April +8.7%; +13.7% y/y (range: +12.2% to +16.6%) vs. April +15.6
Japan’s core machinery orders, a key leading indicator of business investment in equipment and software, are forecast to slip back 5.0% on the month in May after posting an unexpected rebound in April with a sharp 8.7% gain and slumping 9.4% in March. But the data is also likely to show persistent domestic demand for computers, reflecting the need to digitize operations to cope with labor shortages, as well as strong demand for equipment to produce memory chips amid the global move to build artificial intelligence data centers.
Last month, the Cabinet Office maintained its assessment that machinery orders are “showing signs of a pickup.” The three-month moving average rose 3.7% in April after slipping 0.9% in March rising 7.5% previously.
Thursday, July 16
1330 JST (0430 GMT/0030 EDT Thursday, July 16) The Bank of Japan releases the quarterly survey on consumer sentiment, inflation outlook.
In the March quarter survey conducted from Feb. 4 to March 9, the consumer confidence index continued to improve to a two-year high of -45.5 from -50.4 in December and -58.7 in September, although just over a half of respondents still said things were worse than a year earlier. By contrast, the index showing sentiment a year ahead dipped slightly to -18.5 after picking up sharply to -18.3 from -40.2. The Iran war broke out in late February, triggering a spike in global energy prices in March.
On the inflation outlook for 12 months ahead, the share of those who projected that prices would rise declined to 83.7% of the respondents in March from 86.0% in December and 88.0% in September. The median of the projected inflation rate was 10.0%, unchanged from the previous two quarters. In the face of elevated costs for essential goods, consumers have felt much higher inflation than the consumer price index shows. As for inflation five years ahead, the share of those who forecast higher prices fell slightly to 82.6% after shrinking at a faster pace to 83.0% from 84.8%.
Friday, July 17
– The Diet’s special 150-day session is scheduled to end. Prime Minister Sanae Takaichi called a snap election in January for a Feb. 8 vote, delaying the start of what is usually called an ordinary 150-day session for about a month. Some opposition parties are calling for an extension of the assembly to allow more debate time.