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Capital Spending Declines as Japan Export-Led Recovery Slow to Spread

Japanese businesses cut spending for a 12th quarter, signaling the export-led recovery has been slow to spread to domestic demand.

Capital spending excluding software fell 12.9 percent in the three months ended March 31 from a year earlier, after sliding 18.5 percent in the previous quarter, the Finance Ministry said today in Tokyo.

Profit grew at a faster pace than sales, an indication that cost-cutting is driving a rebound in earnings, the ministry said. Bank of Japan board member Miyako Suda said today that the European sovereign debt crisis is clouding the economic outlook and may dissuade businesses and consumers from spending. Yesterday’s resignation of Prime Minister Yukio Hatoyama came amid signs the recovery is losing momentum.

“Companies’ efforts to cut costs are improving their profitability, but they aren’t in a rush to increase spending given the uncertainties over the economic outlook,” said Susumu Kato, chief economist at Credit Agricole CIB and CLSA in Tokyo.

Investors shrugged off the report, with stocks rebounding after figures showed sales of U.S. homes and cars rose. The Nikkei 225 Stock Average climbed 2.9 percent at 1:17 p.m. in Tokyo, paring the year’s losses to 6.3 percent. The yen traded at 92.17 per dollar after weakening 1.3 percent yesterday following Hatoyama’s decision to quit.

Unstable Markets

Globally, “stock and currency markets are increasingly unstable, which could lead to a deterioration in corporate and household sentiment, hurting capital and consumer spending not only in Europe but Japan as well,” central bank policy maker Suda said in a speech in Wakayama, western Japan.

The government will downgrade first-quarter gross domestic product figures based on today’s report, according to Credit Agricole’s Kato. He predicts revised GDP figures on June 10 will show the economy grew at an annual 4.2 percent pace last quarter, slower than the 4.9 percent reported last month.

The capital spending component likely fell 0.9 percent from the previous quarter, compared with a 1 percent increase in the preliminary report, he said.

Companies’ sales rose 10.6 percent, the first increase in nine quarters, today’s data showed. Profits surged 163.8 percent, the biggest gain since the survey began in 1955.

Sony, Takeda

Sony Corp. and Takeda Pharmaceutical Co. are among companies that are concerned about business prospects.

Even as Sony forecast its first annual profit in three years, the company said last month that it may suffer a “significant impact” if the European debt crisis spreads. Takeda, Asia’s largest drugmaker, said last month that net income will fall by a third in the next three years and it aims to save 50 billion yen over three years by eliminating jobs.

“Business investment may recover gradually, but only at very low levels,” Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, said before today’s report. “Capital spending will likely be limited to replacing depreciated assets and companies remain reluctant to make new investments to boost production capacity.”

Government data in the past month signaled consumers aren’t reaping the benefits of the rebound in overseas demand. Industrial production grew at a slower pace than economists forecast in April, while the unemployment rate rose, household spending fell and deflation deepened.

Still, Bank of Japan Governor Masaaki Shirakawa said this week that the nation’s recovery is becoming more self-sustained. The central bank raised its view of the economy last month, saying corporate spending is showing signs of “picking up” and employment conditions are improving.

“Capital spending will likely become an extra driver to Japan’s export-led recovery this fiscal year,” said Naoki Iizuka, senior economist at Mizuho Securities Co. in Tokyo. “Corporate cash flow is recovering.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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