Japan machinery orders: You could have it so much better

by SR on May 16, 2012

Weakness in overseas orders continues

Japan machinery orders, core private orders year-to-date in billions of yen

  • Overall machinery orders rise 4.1% compared to previous month but…. The ESRI arm of Japan’s Cabinet Office announced machinery orders for the month of March 2012 this morning. The seasonally adjusted figure rose by 4.1% month-on-month to Y2.2 trillion, but overseas orders had another weak performance, falling by 14.4% compared to February to Y784.9bn. (In February orders fell 13.4% MoM, again on a seasonally adjusted basis.) In the autumn of 2011 we had a run of sequential increases in overseas machinery orders but those have petered out as concerns about Europe have returned front and centre. Core private machinery orders (non-governmental orders that also exclude the larger and lumpy shipbuilding and power generation orders that distort the total) fell month-on-month by 2.8% to Y746.3bn. Even allowing for imperfect seasonal adjustment this suggests that domestic demand was at best flat for this category in March. So we have falling overseas orders and flat domestic orders. It’s hardly inspiring is it?
  • Which would you prefer? The chart above, or the chart below? You might point out that this is only one month and I would agree that one shouldn’t get carried away by a single data point. Except I would argue that orders in other areas corroborate this weakness. Furthermore, you don’t have to wed yourself to machinery stocks. If you want something related, look at autos and auto parts. The chart above shows cumulative machinery orders to Japanese companies. As you can see 2012 orders (the red line) are pretty much the same as orders for the same period in 2009, 2010 and 2011 (remember that this is a cumulative series, which damps volatility). 2012 orders are slightly better, but are a long way below those of 2008. Now look at the chart below, which shows Toyota’s global production. Not only is Toyota’s cumulative auto production up to March 2012 clearly ahead of production in 2009 and 2011 (as one would expect) but it is also ahead of the same period in the strong 2010 and even 2008. Why fight the tape? It is hard to refute the view that Japan autos and auto parts are in much better shape as a sector than Japan machinery – at least this year.

Toyota global auto production year-to-date

  • Stock picking still matters. While I am explicitly making a call for auto parts and auto parts in preference to machinery, there will of course be beneficiaries in the machinery sector of the rising demand in the auto space. Many auto parts suppliers are raising capex, such as Aisin Seiki, which plans to hike spending by 33% YoY in FY3/13, or Toyota Industries (+71%), or Toyota Boshoku (+12%). This will certainly help some equipment vendors. Contact your nearest friendly machinery sell side analyst for ideas.

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