By Daniel Leussink

TOKYO (Reuters – Japan’s core machinery orders dropped for the first five months in January. It is a concerning sign that the economy, already under increased pressure due to the Ukraine conflict and rising energy and raw materials prices, has fallen.

It is unlikely that core orders will rise, but there are hopes that private demand will be supported in the third largest economy in the world. This happens as businesses struggle to cope with high input costs and shortages.

According to the Cabinet Office, core orders, an extremely volatile data series that is used to indicate capital spending over the following six-to nine months, dropped 2.0% in January, from December. It was the first time they had fallen in five years, according the data.

The contraction was in line with the median economist’s estimate of 2.2% and it followed an increase in 3.1% in previous months.

Capital Economics’ Japan economist Tom Learmouth stated that “the fall in machine orders in January indicates that business investment might not recover much this quarter after a disappointing 2021.”

Japanese businesses could hold off on spending due to rising commodity and transport costs, which are pushing up wholesale inflation and cutting corporate margins.

The core orders, which do not include volatile numbers like shipping, rose 5.1% in January as compared with the previous year, data showed.

Monthly orders from manufacturers fell by 4.8% while that of non-manufacturers contracted 1.9%.

Masato Kike, senior economist at Dai-ichi Life Research Institute said that it was worrying that most manufacturers saw their orders fall.

According to him, “Business conditions in the future will probably worsen for manufacturers due to rising energy costs caused by Ukraine’s crisis,”

Japan’s economy saw a decline in third-quarter last year. However, it recovered to growth in October and December. The rebound, however, was less than originally expected due to lower growth in capital and private consumption.

The Ruling Coalition officials called for an additional spending package this week to compensate the economic impact from Ukraine’s crisis. It is already affecting households and retailers, driving up food and energy costs and hurting household finances.