Japanese Industrials continue to bleed out
May machinery order data released overnight by the Japanese Cabinet office registered at a third consecutive month-over-month decline with a year-over-year shortfall of 39%. In fact, at 668 billion Yen (SA), orders are now at their lowest absolute level since the summer of 1987. As a leading indicator for production, declining orders for industrial machinery continue to suggest that factory managers are restricting investment in the face of still declining demand for exports.
Industrials are further hampered by a still dead credit market, with expectations that BOJ will be forced to extend its emergency credit program since liquidity has still failed to materialize in the commercial paper market. These still lower expectations for near term production also bodes ill for the employment picture, placing further strain on the Aso administration's programs to stimulate domestic demand.
Trapped in a vicious cycle, Japanese industrials are already finding that decreased global demand has been matched by increasingly competitive pricing from Korean and ASEAN based rivals and failure to invest at this stage in the cycle could signal a slower recovery process if and when demand rebounds.
Calling a bottom in Japan has thus far been as difficult as catching a falling knife. With no signs of strengthening demand from their major exports markets in the near term, "less bad" is not good enough. As Japanese equities continue to trade as a proxy for Yen relative strength, we are maintaining our negative bias. For now no long term positive catalysts appear on the horizon.