TOKYO (Reuters) – Overseas orders for Japanese machinery posted their biggest decline in more than a decade in December and manufacturers expect orders to fall further this quarter as trade friction weigh on global demand.

Data released on Monday showed core machinery orders, considered a leading indicator of capital expenditure, fell 0.1 percent month-on-month in December. This was the first decline in three months but was smaller than the median estimate for a 1.1 percent decrease.

Highlighting bigger concerns about the external environment, however, was a 21.9 percent month-on-month tumble in machinery orders from overseas, the biggest fall since November 2007.

A cabinet official said the slump was partly due to the base effect of large overseas orders seen over the past two months, however, forecasts show manufacturers expect overseas orders to fall 17.1 percent in the current quarter.

“Capital expenditure won’t be that strong, and this will hamper Japan’s overall growth,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“We see the impact of trade friction. There’s a lot of uncertainty and manufactures are becoming more cautions.”

Manufacturers surveyed by the Cabinet Office forecast core orders will fall 1.8 percent in January-March after decreasing 4.2 percent in October-December. The Cabinet Office cut its assessment of orders to say they are stalling.

Global trade has already slowed as the United States and China exchanged tit-for-tat tariffs in a heated dispute over trade. The proposed introduction of further tariffs, if a resolution between Washington and Beijing is not found, would hurt Japan’s export-focused economy.

Orders from manufacturers fell 8.5 percent month-on-month in December after a 6.4 percent decline in November, due to lower orders from makers of manufacturing equipment and electronics.

Service-sector orders rose 6.8 percent, faster than a 2.5 percent increase the previous month due to a pick-up in orders from the telecommunications sector. Despite this acceleration, economists are likely to remain more concerned about the manufacturing sector and global demand.

“Core” machinery orders exclude those for ships and from electricity utilities.

Japan’s gross domestic product returned to expansion in the fourth quarter after a series of natural disasters caused a contraction in the previous quarter, but economists have warned that they are not optimistic about the outlook this year.

The trade war between the United States and China, the world’s two largest economies, is a major risk for Japan’s auto, electronics, and heavy machinery sectors, which export goods to China where they are used to make finished products destined for the United States and other markets.

Another risk is the Japanese government’s plan to raise the nationwide sales tax to 10 percent from 8 percent in October.

The government needs the extra tax revenue to pay for rising welfare costs, but some policymakers and economists worry the tax hike could hit consumer spending and weaken sentiment.

Japan’s policymakers have long argued that an increase in business investment will contribute to economic growth as companies replace old manufacturing equipment and invest in new technology.

However, the chance of a growth spurt this year driven by corporate investment has dimmed considerably, economists say.

(This story corrects syntax in headline)

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