Japan's November machinery orders stall in worrying sign over business spending

By Stanley White

TOKYO (Reuters) - Japan's core machinery orders slowed sharply in November in a sign corporate capital expenditure could lose momentum as a bruising U.S.-China trade war spills into the global economy.

The slight 0.02 percent decline month-on-month in core machinery orders, considered a leading indicator of capital expenditure, was well below the median estimate for a 3.5 percent increase and marked a slowdown from a 7.6 percent expansion in October.

A trade war between the United States and China is weighing on growth in the world's two largest economies, which threatens Japan's growth because its exporters could delay investment and hiring due to worries about corporate profits.

The potential slowdown in business spending comes at a difficult time for Japan because the government is preparing to raise the nationwide sales tax in October, which is expected to curb consumer spending.

"Companies are delaying capex plans because they're worried about the trade war, so Japan's economic growth is likely to fall below its potential rate," said Hiroaki Muto, economist at Tokai Tokyo Research Center.

"This means less inflationary pressure. The government should not hesitate to delay the sales tax hike. The Bank of Japan may even have to buy exchange-traded funds in support."

Orders from manufacturers fell 6.4 percent in November from October after a 12.3 percent increase in October due to a decline in orders from manufactures of electronics and steel, data from the Cabinet Office showed on Wednesday.

Service-sector orders rose 2.5 percent, slower than a 4.5 percent increase the previous month. Orders from parcel delivery and logistics companies rose in November.

However, a decline in orders from construction and telecommunications companies dragged on growth in orders from the services sector.

"Core" machinery orders exclude those for ships and from electricity utilities.

RISING ECONOMIC HEADWINDS

Japan's policymakers have long argued that an increase in business investment will contribute to economic growth as companies replace old manufacturing equipment and invest in new technology.

However, the chance of a growth spurt this year driven by corporate investment has dimmed because international trade tensions and slowing global growth could hurt Japan's export-oriented economy.

Japan is scheduled to raise the nationwide sales tax to 10 percent from 8 percent in October, because it needs extra tax revenue for rising welfare costs.

To soften the blow to consumer spending, food and some daily necessities will be exempted from the tax hike. The government will also offer tax breaks for purchases of cars, homes and other durable goods.

Still, some economists and policymakers worry that the tax hike will damage consumer sentiment and harm the economy.

The BOJ's next policy meeting ends on Jan. 23, but many economists say the central bank has limited options to boost growth.

The BOJ guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent, but the amount of bonds the BOJ buys to keep long-term yields low are distorting the market, some analysts say.

It also buys exchange-traded funds, which are linked to the stock market, to lower risk premiums. This policy has also faced criticism for exerting excessive influence on stock prices.

(Editing by Jacqueline Wong)