Japan Capex Revisions

Japan capex cuts point to GDP upgrade
TOKYO, June 4 – Japanese companies cut spending on plant and equipment by less than expected in January-March, suggesting that gross domestic product for the quarter may be revised up slightly to a 3.8 per cent contraction from a preliminary reading of a record 4.0 per cent decline.

The figures will likely be seen as supporting the view of the government and economists that after bottoming out in the first quarter Japan is on a slow path to recovery from its worst recession since World War Two.

The economy is likely to grow only gradually from the second quarter as overseas demand is not strong enough to encourage Japan’s manufacturers to rapidly boost spending. Falling wages and a rising jobless rate will also weigh on growth in the coming months, economists say.

”Overall, corporate earnings conditions remain severe, so declines in capital expenditure were inevitable. While the pace of decline was smaller than expected, there’s no doubt capital spending was weak in the first quarter,” said Kyohei Morita, chief economist at Barclays Capital.

Corporate spending declined a record 25.3 per cent in the first quarter of 2009 from a year earlier, the Finance Ministry said on Thursday, slightly less than a market forecast for a 26.5 percent slide.

The fall in first-quarter capital spending followed a 17.3 per cent drop in the final three months of last year. The figures will be used to help calculate revised GDP due on June 11.

In preliminary data the capex component fell 10.4 per cent, slashing Japan’s overall GDP by 1.6 percentage point. The capex figure may be revised up to a 9.1 percent decline, leading to GDP being revised to a 3.8 per cent fall, Morita at Barseclays said.

Also the value of inventories fell by 5.6 trillion yen ($58.29 billion) in the first quarter from a year earlier, faster than a 4.6 trillion yen annual decline in the previous three-month period, which could mean GDP being revised to a 3.6 per cent decline, said Seiji Adachi, a senior economist at Deutsche Securities.

”I’m still expecting a double dip,” he said.

”After the bounce in industrial output is over, the economy will slow again due to weak consumption and a severe labour market. Capex will also be a problem for any V-shaped recovery.”

Japanese firms’ recurring profits in January-March fell 69 per cent from a year earlier while sales dropped 20.4 per cent, both record falls and underlining the severity of the recession.

Economists expect Japan’s GDP to grow a modest 0.1 per cent in the second quarter and 0.5 per cent in the third quarter as overseas demand stabilises after a collapse in global trade last year, according to a Reuters survey last month.

External demand probably won’t be strong enough to support a faster recovery in Japan’s economy as companies are under pressure to cut costs by reducing wages and the unemployment rate is expected to rise from its current 5 1/2-year high of 5.0 per cent, weighing on domestic demand.