Japan machinery orders: 2nd worst month since 1997

by SR on July 9, 2012

Japan machinery orders, core private orders (SA)

Japan machinery orders: second-largest monthly decline since 1997

Japan’s core private machinery orders (which exclude power and shipbuilding orders) plunged in May 2012 by 14.8% relative to April – see the chart above. This is a seasonally adjusted series, so it doesn’t really make sense to look at the year-on-year figures too closely; the month-on-month figure is what counts. Reuters says the median forecast from its own poll was a sequential decline of 3.3%. This is a very weak performance although it’s not really surprising given the turmoil in Europe that was ongoing in May. I took a look back to 1997 and as far as I can see this -14.8% MoM figure is the second-largest decline over that 15-year period. March 1997 posted a 14.9% MoM decline and September 2000 recorded a 14.5% fall relative to the previous month. Again, this is a seasonally adjusted series, but for what it’s worth, the chart is below.

Japan machinery orders, core private orders (SA) month-on-month change

Of course, you can’t eat seasonally adjusted orders – they are just a useful statistical fiction – so the following chart shows the real, non-seasonally adjusted core private machinery orders. As you can see, from January to May 2012 core private machinery orders (the red line) are only just ahead of 2011 orders for the same period (the blue line). There is no real growth here.

Japan core private machinery cumulative orders (NSA) to May 2012

Honestly, I think you want to wait until the bad news recedes before looking at machinery stocks. No doubt there are bright spots somewhere in the machinery sector somewhere in the world; after all, these orders are a very broad indicator for machinery firms in just one country i.e. Japan (although some of these will be for export). There is also an argument to be made that all the bad news is in the price and that there are no shoes left to drop: Europe is horrible, China has been awful, Japan is moribund and the US refuses to stage a solid recovery. So how much worse can it get? And how much further can stocks fall? I have abundant sympathy for that point of view. Careful stock-picking with one eye on the medium term could generate significant returns for the brave.

Nevertheless, my argument would be that Toyota group auto-related stocks, look like a simpler, safer bet. No, it’s not a particularly clever or a particularly brave call, but cleverness tends to get pounded by fear in this kind of market and my remaining reserves of bravery are limited. I am not arguing that there is no risk in auto-related stocks such as Denso, or Aisin Seiki, but for this sub-sector at least you don’t have to fight the fundamentals, which are looking very promising. Results for the first quarter of the March 2013 financial year (April to June 2012) will be released at the end of July 2012 and should be unusually strong. I will leave you with this chart of Toyota’s global production, which so far in 2012 (the red line) is ahead not only of 2011 (the blue line) which is what one would expect, but ahead even of the pre-financial crisis 2008 (the green line). Compare that to machinery orders above. A very different picture isn’t it?

Toyota global cumulative production in million units to May 2012

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