Japan May Raise GDP Estimate After Capital Spending Rose in Third Quarter

Japan’s economy probably grew faster last quarter than the government initially estimated, analysts said after a report showed companies boosted spending for the first time in more than three years.

Gross domestic product expanded an annualized 4.2 percent in the third quarter, compared with a preliminary reading of 3.9 percent, according to the median forecast of 10 economists surveyed by Bloomberg News. A Finance Ministry report today showed capital spending excluding software rose 4.8 percent, a figure that will be used to calculate revised GDP due Dec. 9.

The rebound in business investment may not be strong enough to counter slowing growth in exports, which pulled Japan out of its deepest postwar recession in 2008-2009. The yen’s 10 percent advance against the dollar this year is threatening the profits of exporters and eroding the competitiveness of Japanese companies aboard.

“Japan’s capital investment is rising at an extremely slow pace,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo, who forecasts the economy will contract this quarter. “It’s hard for companies to anticipate any robust demand at home and the yen’s strength is clouding the outlook for exports.”

The preliminary report released last month showed the third-quarter growth was led by private consumption, which accounted for about 60 percent of GDP. Households rushed to buy cars before the end of the government’s subsidy program and smokers stocked up before an Oct. 1 tobacco-tax increase.

Not Strong Enough

“Today’s report confirms that capital spending has remained relatively strong, but in the long run, this economic recovery hasn’t been strong enough to enable more aggressive increases in capital spending,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.

Government data so far for October have provided early signs that the country’s economy will likely shrink this quarter. Industrial output had the biggest drop since February 2009 and the jobless rate unexpectedly climbed. Retail sales declined for the first time this year, while export growth slowed.

Japan’s GDP is expected to contract at a 0.9 percent annualized pace in the three months through December, according to a survey of 42 economists by the Japanese government- affiliated Economic Planning Association.

Prolonged Deflation

“A gradual recovery may continue for capital spending, but companies probably can’t be positive about their sales outlook because of prolonged deflation,” said Yuichi Kodama, economist at Meiji Yasuda Life Insurance Co., Japan’s third-biggest life insurer. “In that sense, any recovery in capital spending won’t be strong enough to become the driving force for the recovery.”

A rebound in earnings driven by corporate cost cuts and demand in emerging nations has been tempered by the yen’s advance, which is eroding the competitiveness of Japanese exporters overseas.

Sales rose 6.5 percent in the third quarter, slowing from 20.3 percent in the previous three months, while profits climbed 54.1 percent after a 83.4 percent increase in the second quarter, today’s report showed.

Rohto Pharmaceutical Co., a Japanese drugmaker, last month cut its full-year profit forecast, citing the strong yen. Nikon Corp., a maker of cameras, lenses and chip-making equipment, lowered its full-year operating profit and revenue forecasts because of the currency’s advance.

Stimulus Package

The Japanese parliament passed on Nov. 26 an extra budget to fund Prime Minister Naoto Kan’s stimulus package aimed at fighting deflation and combating the stronger yen. To foster growth, the Bank of Japan cut its benchmark interest rate and created an asset-purchase fund to buy government and corporate debt and assets such as real estate investment trusts and exchange-traded funds in October.

Kubota Corp., Asia’s largest farm equipment maker, said last month that first-half profit rose 33 percent on increased sales in the U.S., Europe and Asia outside Japan.

Bridgestone Corp., the world’s largest tiremaker, said in October that it will invest 24 billion yen to increase production capacity for large tires and steel cords for vehicles used by construction and mining companies.

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

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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