Cityscape view with skyscrapers and city lights at night, Tokyo, Japan. Photo: AFP

Analysts at Citibank expect to see a capex rebound in Japan this year, especially among manufacturers, but warn of risks to this view. Their analysis depends on a boost in capex in manufacturing firms, but they write that they have not seen signs of this yet. Note the repeated emphasis that there is risk to their view:

“What appears to have driven the capex uptrend in recent years is construction investment fueled by the expected boost in demand from the 2020 Tokyo Olympics. However, it seems that the economy is already approaching a mature phase in terms of the stock cycle. The special factor of Olympics-related construction investment will likely bolster capex but we should be aware of the heightened risk that the underlying capex trend may become weak. We cannot deny that there are risks to our view, however.

“Private-sector machinery orders excluding ships and power plants, i.e. core machinery orders, which is a leading indicator for machinery investment, in the first quarter stood 1.4% below the fourth quarter average, following +0.3% QoQ in Q4 2016. According to the official survey on machinery makers, private core orders are likely to decrease 5.9% QoQ in the second quarter. Our view emphasizes a boost in capex at manufacturing firms but we have not seen any clear signs of this so far.

“There is a heightened risk that the timing of machinery investment may be delayed more than we expect.”