Japan's core private-sector machinery orders, a leading indicator of corporate capital spending, rose a stronger-than-expected 8.8 percent in July from the previous month, official data showed Wednesday.
The increase in core orders, which exclude particularly volatile demand from power companies and for ships, was much higher than market expectations of a 1.8 percent rise, according to a Dow Jones and Nikkei business daily poll.
July's data followed a 9.1 percent drop in May and a marginal recovery of 1.6 percent in June, suggesting the outlook for business investment may hold up for now despite headwinds from a strong yen, deflation and slowing growth.
The government expects machinery orders to grow by just 0.8 percent in the July-September quarter.
"Capital spending bottomed out late last year through to early this year," he said. "Corporate capital spending will continue recovering slowly this year."
Private sector orders for machinery are closely watched because they provide an advance indication of business investment sentiment, a significant part of annual economic output.
But a surging yen still poses a large threat to the Japanese economic outlook, possibly prompting some companies to shift their domestic investment overseas, a government official was quoted by Dow Jones Newswires as saying.
"I want to emphasise my feeling of crisis that the strong yen poses a very large downside risk to the economy," said the unnamed Cabinet Office official.
The yen's strength is creating uncertainty over whether Japanese companies will invest in Japan or shift their planned investment to other countries, the official said.
On Tuesday the Bank of Japan signalled stronger concern about the impact of the yen on the economy.
"We are aware that Japanese exporters have been significantly affected by the yen's strength," Bank of Japan governor Masaaki Shirakawa said Tuesday.
The safe-haven currency's strength puts Japanese exporters at a disadvantage against foreign rivals and erodes repatriated profits.
For every one-yen rise in the currency's value against the dollar, exporters can lose tens of billions of yen earned overseas when repatriated.
Japanese firms face a litany of woes -- overseas demand moderating amid an increasingly uncertain global economic outlook, the strong yen and domestic demand threatened by the waning effects of government stimulus.
Source: AFP Asian Edition