Japan machinery orders April 2012: don’t be fooled by domestic strength

by SR on June 13, 2012

Machinery order strength is all domestic

Japan machinery cumulative orders January to April 2012 (billion yen)

  • Conclusion: rebuilding in Northern Japan drives domestic orders but overseas weak; look at auto stocks instead of machinery plays. The ESRI announced Japan machinery orders this morning (2012-06-13). Total orders (that is actual data, not seasonally adjusted) for January to April 2012 are up 4.1% YoY over the same period last year. That this is a domestic phenomenon can be seen from overseas orders, which have fallen 2.8% YoY for the January to April 2012 period. Domestic orders rose by 9.3% YoY. So my guess is that this is a fragile recovery being driven by reconstruction in Northern Japan after the earthquake of March 2011. Once that rebuilding boom runs its course, what will drive orders? The machinery sector is a tough row to hoe and I think it will stay that way for as much as another couple of quarters. Meanwhile, Toyota’s global production hit a record high in March and stayed close to that level in April. Doesn’t cars look like a better environment than excavators?

Meanwhile, Toyota and Toyota parts suppliers are having a great year

So, April 2012 seasonally adjusted core machinery orders (that’s orders excluding shipbuilding and power generation equipment, which tends to be volatile) from the private sector rose 5.7% month-on-month in Japan. This chart shows the recent trend.

Japan core private sector machinery orders, seasonally adjusted (billion yen)

In March 2012 the same category of orders fell 2.8% month-on-month. The financial media are reporting the April figure as a positive surprise. I’m not convinced we have much to get excited about. Look again at the chart at the top of this post: machinery orders for 2012 (the red line) are only just ahead of the previous year level (the blue line) and a long, long way behind 2008 (the green line). Now look down at the next chart, showing Toyota global production. Not only is auto output thus far in 2012 clearly ahead of 2011 (understandable) but it is also well ahead of 2010 (the purple line), which was a strong year, and is even ahead of 2008 levels (the green line). I would look at the Toyota suppliers, rather than Toyota itself – companies like Denso and Aisin Seiki – but both Toyota and its parts suppliers should have an excellent year in 2012.

Toyota global auto production (1000 units)

On the whole I think the market has been sort-of rational about this, but I still wince when I see companies like Hitachi Construction (share price up 13.8% between the last day of 2011 to yesterday) or Makita (+11.8%). Apparently investors think there’s little to choose between the former two names and parts suppliers such as Denso (+14.1%) or Aisin Seiki (+12.8%), even though the fundamentals look so much better for the latter two over the next 6-12 months.

Japan machinery stocks share price performance year-to-date (%)

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