Fresh signs that Japan's economic recovery may be losing momentum emerged Thursday, as a gauge of future business investment fell, the broadest measure of the country's trade slipped, banking lending continued to decline, and worker sentiment deteriorated.
The results highlight how Japan, which relies on exports to fuel its growth, remains vulnerable to a slowdown in the global economy. The apparent cooling of Japan's recovery, moreover, could hurt Prime Minister Naoto Kan and his ruling Democratic Party of Japan in an Upper House election this Sunday.
Core machinery orders fell 9.1% on month in May, the sharpest drop since August 2008, the Cabinet Office said Thursday. That was the first fall in this leading indicator of capital spending in three months, and came after orders rose 4.0% in April. The result was much worse than the median forecast for a 3.0% decline in a survey of economists by Dow Jones Newswires and Nikkei.
The weakness shows that "firms are not likely to add to their business investment actively in the near term as there is still the risk that economic growth will be hampered due to a possible slowdown in overseas economies," said Norio Miyagawa, an economist at Mizuho Securities Research & Consulting.
Analysts said one factor in the fall was likely the concern firms had in May that Europe's sovereign debt woes could continue to roil global financial markets and push down trade.
Another factor in the fall, they said, was the strong yen, which eats into profits of exporters by making their products more expensive overseas and diminishing revenue sent back to Japan. The Bank of Japan's quarterly tankan business-sentiment survey showed big manufacturers and non-manufacturers plan to increase capital expenditure by 4.4% in the fiscal year started in April. But the strong yen could complicate that outlook, analysts said.
While stressing that the machinery order data are volatile and that May's fall likely doesn't change expectations for gradual recovery to continue, Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute, said that the strong currency could prompt firms to spend less.
"Many manufacturers rely on exports, so they are particularly sensitive to the strong yen," Mr. Nagahama said.
Separate data released Thursday by the Ministry of Finance showed that Japan's current account surplus fell 8.1% on year to 1.205 trillion yen ($13.7 billion) in May, as export growth slowed due in part to the fading effects of economic stimulus measures overseas.
The lower surplus in the current account, the broadest measure of Japan's trade with the rest of the world, came as the trade surplus fell for the first time in a year, dropping 0.6% to 391.0 billion yen, the data showed.
Exports rose at their slowest pace in five months. While overseas shipments were still up a solid 33.8%, that represented a slowdown from April's 42.7% rise.
Meanwhile, lending by banks excluding credit unions fell 2.1% on year in June, after dropping at the same pace in May, data released by the Bank of Japan showed. The continued fall reflected the still-low demand for borrowing for investment among Japanese firms, analysts said. While that was due in part to greater liquidity among companies whose profits have rallied, it also showed that overall capital expenditure remained low, analysts said.
Thursday's data follow other signs in recent weeks that Japan's economy may be losing some steam, as factory floors recently dialed down production and consumers remain reluctant to spend.
Industrial production fell 0.1% in May, for the first fall in three months, data last week showed. The jobless rate worsened to 5.2% in the month, from 5.1% in April, while household spending dropped unexpectedly by 0.7% on year in May, separate data showed last week.
Many economists say Japan's gross domestic product, which expanded an annualized 5.0% in the January-March quarter, will likely expand at a much slower pace in the April-June period. The average estimate for GDP growth in April-June in a survey by the government-affiliated Economic Planning Association released Thursday was for a 1.6% annualized expansion.
Adding to concern over Japan's longer-term growth prospects, the International Monetary Fund on Thursday lowered its estimate for the country's gross domestic product to a 1.8% expansion in 2011, down from its previous estimate in April for 2.0% growth.
The IMF raised its estimate for 2010 to 2.4% growth from 1.9% expansion. But the change was due to the sharper-than-expected export gains at the beginning of the year, which are now slowing.