Japanese data on machinery orders were released today by the Economic and Social Research Institute of the Cabinet Office of the Government of Japan. Although total machinery orders declined by 8.8% in August from July, there were several encouraging trends among the details of the data. Some of the good news is obscured by the extreme volatility of even the seasonally adjusted series. The decline was largely the result of a 28% decline in foreign orders, which tend to vary substantially from month to month. Although volatile, the trend of foreign orders has been positive since early 2002. Both public and private orders rose, 8.1% and 6.0% respectively. Even though the monthly rise in public orders at 8% was greater than that of private orders at 6%, it is clear from the first chart that shows the value of private and public orders that public orders have been on a declining trend and private orders on a rising one since 2001.

One of the most closely watched series is "Private orders excluding ships and electric power," which tends to be a good indicator of future capital spending. The second chart compares these orders aggregated on a quarterly basis with private expenditures on plant and equipment from the national accounts. As can be seen there is a close relationship with a correlation of .91. These orders rose 8.2% in August and reached the highest level since October, 2000.

Japan's Nikkei 225 Stock Price Average has been rising strongly since earlier this year and reached 13,556.71 (5/16/49=100) today the highest value since May, 2001. While "Private orders excluding ships and electric power" are not the sole factor responsible for the rise, the series it is representative of the generally improving news on the Japanese economy which may be a prime factor in the advance of stock prices. In the final chart we show the Nikkei, aggregated on a monthly basis and the monthly series, "Private orders excluding ships and electric power".