Japan Machine Orders Rises

Japan's machinery orders, a key indicator of corporate spending plans, rose at triple the pace economists predicted, reinforcing expectations the central bank will raise interest rates as soon as next month.

Orders climbed a seasonally adjusted 5.9 percent in May from the previous month, the Cabinet Office said in Tokyo today, a second monthly gain. The median estimate of 32 economists surveyed by Bloomberg News was for 1.9 percent.

Manufacturing equipment orders rose at the fastest pace in almost a year, signaling industrial production is likely to recover. Two Bank of Japan policy makers last week said keeping borrowing costs, the lowest among major economies, unchanged for too long could hurt economic growth in the long run.

``It was a surprise to see a strong machinery orders report and it signals we can count on a rebound in production,'' said Yoshimasa Maruyama, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. ``This gives the BOJ one less thing to worry about and we expect them to raise rates in August.''

The yield on Japan's 10-year bond rose 2 basis points to 1.95 percent, the highest in three weeks, at 12:41 p.m. in Tokyo. The Nikkei 225 Stock Average climbed 0.6 percent, led by machinery makers Komatsu Ltd. and Murata Manufacturing Co.

Manufacturing orders surged 15.3 percent, the first increase in four months and the biggest in almost a year, the Cabinet Office said. Non-manufacturing orders fell 0.8 percent after climbing 10.5 percent the previous month.

`Pretty Positive'

Today's report ``provides a pretty positive indicator of capital spending and business confidence going forward,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. She also sees an August rate increase.

The nation's largest companies plan to boost outlays on factories and equipment 7.7 percent this year, the central bank's Tankan business survey showed last week, more than double the 2.9 percent forecast in March. Companies boosted investment by 10 percent in the year ended March, the fastest pace in 16 years.

Murata Manufacturing, the world's biggest maker of ceramic parts that regulate electricity, expects profit to rise 9.4 percent in the year ending March, thanks to higher demand. Murata's shares rose as much as 1.3 percent after today's report.

``Order bookings are in line with our plan, so better than last year,'' Yasutaka Murata, the Kyoto-based company's chairman, said in an interview last week. ``We are unable to accumulate inventories because of a high order intake.''

Japan's companies are gearing up for resurgent demand from the U.S., the country's biggest export market, said economist Hiromichi Shirakawa.

U.S. Economy

``The business cycle has bottomed out, mainly because the U.S. economy is improving,'' said Shirakawa, chief economist at Credit Suisse Group in Tokyo. Shirakawa, a former Bank of Japan official, predicts an August rate increase.

Credit Suisse last week increased its estimate for Japan's gross domestic product for the year ending March 31 to 2.9 percent from 2.5 percent, citing the pickup in the U.S.

Service providers, encouraged that the lowest jobless rate in nine years will fan spending at home, are also investing more.

Softbank Corp., owner of Japan's third-largest mobile-phone company, said last month it will increase spending on its network in a bid to gain market share. Its mobile-phone unit will boost investment 26 percent this fiscal year to 387.9 billion yen.

Next Rate Increase

The Bank of Japan will keep the key overnight lending rate at 0.5 percent at a policy meeting this week, according to all 25 economists surveyed by Bloomberg News.

Investors see an 80 percent chance of a rate increase in August, up from 79 percent on July 6, according to calculations by Bloomberg News based on the exchange of interest payments provided by Credit Suisse Group.

Governor Toshihiko Fukui said last month that his policy board wants to gather more information on the strength of the economy before raising rates for the third time in seven years. Waiting another month will allow the bank to see more price and production data as well as second-quarter economic growth figures released Aug. 13, a week before the policy board meets.

Industrial production dropped for a third month in May, the longest decline in almost two years, as makers of electronic parts and devices pared excess inventories. Consumer prices excluding fresh food fell 0.1 percent, a fourth monthly drop.

Last week, Deputy Governor Toshiro Muto said failing to raise rates soon ``could cause large swings in economic activity and inflation.'' Fellow board member Kiyohiko Nishimura said ``to stand pat for a long period of time is not a prudent strategy.''

A separate report today showed bank lending slowed in June as large, cash-rich companies shunned debt to fund investment. Loans excluding trusts rose 0.7 percent in June from a year earlier, the Bank of Japan said, slowing from 0.9 percent in May.