TOKYO: Japanese machinery orders bounced back in October with a faster increase than expected, re-affirming the resilience of capital spending - a key driver in the economy’s near two-year expansion.

Core machinery orders, a volatile data series regarded as an indicator of capital spending in the coming six to nine months, climbed 5.0 per cent in October from the previous month, the Cabinet Office said on Wednesday. The gain in core orders, which exclude those of ships and power generation equipment, beat economists’ median estimate of a 3.0 per cent increase.

Orders fell 8.1 per cent in September, the steepest drop in more than two years. Capital spending - investment in factories and equipment - was a big contributor to the economy’s seventh straight quarter of growth in the July-September period, the longest streak on record in data going back to 1994, making up for a rare decline in consumer spending. In the longer term, the government is urging companies to increase capital spending to improve productivity in response to a shrinking labour force as the population declines.

“Machinery orders from manufacturers were especially strong in October,” said Daiju Aoki, UBS Securities regional chief investment officer for Japan. “In the fourth quarter, the manufacturing sector is very solid. I think that exporters are benefiting from demand from China, and there’s demand because of the labour shortage,” he said. Orders from manufacturers rose 7.4 per cent in October, led by chemical makers and electronics manufacturers.

A Cabinet Office official said demand for machinery to make semiconductors and smartphone-related parts was picking up as the economies of China and other Asia countries recovered. But non-manufacturers’ orders rose a more muted 1.1 per cent, after an 11.1 per cent slide in September.

They were supported by demand from shipping and postal firms. UBS’s Aoki said he was concerned about the non-manufacturing sector as consumer sentiment had been hurt in part by higher food prices, which shoppers are reluctant to accept at a time of slow wage growth. “So fourth-quarter machinery orders, from these numbers, could be close to flat compared with the third quarter,” he cautioned.

Compared with a year earlier, core orders increased 2.3 per cent versus economists’ expectations of a 2.8 per cent fall. The government maintained its assessment that machinery orders were showing signs of picking up.

Large Japanese manufacturers turned more optimistic about economic conditions in the October-December quarter, a government survey showed on Monday, in another upbeat sign for an economy on a record run of growth. The business survey index (BSI) of sentiment at large manufacturers stood at plus 9.7, up from plus 9.4 in July-September, according to the joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office.

Agencies