Japan Fails to Plow Yen Profits Back Into Capital Spending

Photographer: Tomohiro Ohsumi/Bloomberg

A pedestrian walks over a bridge in Toyota City, Aichi Prefecture, Japan. Toyota, Motor Corp. which employs almost 70,000 workers in Japan, approved the biggest salary bonus in five years in agreeing to a union proposal for a 2013 average bonus of about 2.05 million yen, compared with 1.77 million yen in 2012. Close

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Photographer: Tomohiro Ohsumi/Bloomberg

A pedestrian walks over a bridge in Toyota City, Aichi Prefecture, Japan. Toyota, Motor Corp. which employs almost 70,000 workers in Japan, approved the biggest salary bonus in five years in agreeing to a union proposal for a 2013 average bonus of about 2.05 million yen, compared with 1.77 million yen in 2012.

The Abenomics euphoria that’s boosted the Japanese stock market 31 percent this year has yet to convince chief executives to invest more in factories and equipment in the world’s third-largest economy.

In the first full quarter of Prime Minister Shinzo Abe’s tenure, capital spending excluding software fell 5.2 percent from a year earlier, according to a survey from the Ministry of Finance released yesterday. Spending by Japan’s biggest companies dropped 4.9 percent in January-March, the biggest decline since the quarter after the March 2011 earthquake.

Unprecedented monetary easing by the Bank of Japan has weakened the yen 18 percent versus the dollar since Dec. 3, helping exporters such as Toyota Motor Corp. (7203) report improved earnings through March and hoist profit targets for the fiscal year that started in April. Yet weak capital spending places fresh importance on Abe unveiling structural reforms within weeks that economists say are needed to revive Japan Inc.

“For companies to want to invest they need more than monetary and fiscal stimulus, they need actual reform,” said Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo.

In earnings forecasts, companies ranging from Honda Motor Co. to Sony Corp. (6758) estimated aggregate operating income of 19.7 trillion yen ($196 billion) this fiscal year, based on 178 forecasts from Nikkei 225 Stock Average (NKY) companies compiled by Bloomberg. The Topix index climbed 2.6 percent in Tokyo, extending its advance this year to 31 percent.

Photographer: Tomohiro Ohsumi/Bloomberg

Receptionists work at the Sony Corp. headquarters in Tokyo. Sony reported annual profit for the first time in five years after Chief Executive Officer Kazuo Hirai used job cuts, asset sales and blockbuster movies to stem losses. Close

Receptionists work at the Sony Corp. headquarters in Tokyo. Sony reported annual profit... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Receptionists work at the Sony Corp. headquarters in Tokyo. Sony reported annual profit for the first time in five years after Chief Executive Officer Kazuo Hirai used job cuts, asset sales and blockbuster movies to stem losses.

Corporate Profits

That’s more than a third higher than the 14.6 trillion yen profit they reported in the 12 months ended March 2012, during which the yen neared post-World War II peaks against the dollar.

Companies may boost spending on equipment and goods in coming months as exports rise, said Kohei Okazaki, an economist at Nomura Securities Co. in Tokyo. There are also some plans to raise compensation. Major Japanese companies may boost summer bonuses by 7.4 percent, the most since 1990, according to a survey published last week by Keidanren, the country’s biggest business lobby.

Exactly how and when companies spend money to replace and refurbish equipment may foreshadow the success or failure of Abe’s efforts to revive the Japanese economy after more than 10 years of deflation. Japanese companies must increase capital spending and boost basic wages for the prime minister’s plan to succeed, said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research.

Photographer: Tomohiro Ohsumi/Bloomberg

Workers walk in front of containers at a shipping terminal in Tokyo. Exports account for about 16 percent of the Japanese economy, according to data compiled by Bloomberg. Close

Workers walk in front of containers at a shipping terminal in Tokyo. Exports account... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Workers walk in front of containers at a shipping terminal in Tokyo. Exports account for about 16 percent of the Japanese economy, according to data compiled by Bloomberg.

Though a lagging indicator, the numbers in the January-March survey show how much ground must be made. As well as the 4.9 percent drop among companies with more than 1 billion yen of capital, comprising 62 percent of the capital outlays surveyed, spending by the small businesses that make up more than a fifth of Japan’s corporations also contracted.

Third Arrow

Companies with 10 million to 100 million yen in capital invested 2.7 percent less on plant and equipment than in the same quarter a year earlier, according to the Finance Ministry.

Abe has pledged to spark investment and growth in Japan through his so-called third arrow of regulatory reform and deregulation. In March, the prime minister announced his intention to join talks on a regional trade pact that may help domestic auto and electronics makers compete with rivals in South Korea.

Companies have already outlined plans to use part of higher profits to return money to shareholders. Toyota, which has surged 45 percent this year, almost doubled its dividend to 90 yen from 50 yen a share a year ago. Including interim dividends, the company plans to spend 285 billion yen in such payments to shareholders this year.

Overseas Risk

“How Japanese companies spend this increased profit will play an essential part in realizing the Japanese economic recovery,” said Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute in Tokyo. “The risk is that some companies may prefer to re-invest overseas profit abroad in fear of the possible strong yen in the future.”

Overseas investment by Japan’s manufacturers will increase by about 20 percent this year to 2.7 trillion yen, according to a survey by the Nikkei newspaper. Investment by Japanese manufacturers in the U.S. alone will rise 30 percent to about 440 billion yen, the Nikkei reported.

Isuzu Motors Ltd. (7202) said May 14 it will raise capital spending almost three-quarters this year to 100 billion yen, with about half going toward expanding output and sales in overseas markets including Southeast Asia, China, and India.

“We are trying to pursue a structure where we build cars where they are sold,” Toyota’s Vice President Nobuyori Kodaira said, when the company announced its dividend plan on May 8. The company doesn’t necessarily plan to increase exports from Japan, he said.

Electronics Struggle

Not everyone is seeing a quick upturn in fortunes. Japanese electronics companies have suffered more from international competition and are struggling to generate profits even with a weaker yen.

Sony reported annual profit for the first time in five years after Chief Executive Officer Kazuo Hirai used job cuts, asset sales and blockbuster movies to stem losses. South Korea’s Samsung Electronics Co. (005930) smartphones outsold Sony’s 7-to-1 last year, and its flat-panel TVs generated more than triple Sony’s revenue. Samsung’s capital expenditure at 23 trillion won ($20 billion) last year, according to data compiled by Bloomberg, outstrips that of its Japanese rivals.

Panasonic Corp. (6752) postponed a “sizable investment” because of its financial situation, Kazunori Takami, head of the company’s appliance unit, told reporters in Osaka yesterday. “We’re trying to decide whether to wait till the right time to make a sizable investment or to make small investments over time,” he said.

Japan Market

Exports account for about 16 percent of the Japanese economy, according to data compiled by Bloomberg. Companies listed on Tokyo’s 1,711-member Topix Index (TPX) rely on Japan for more than 80 percent of sales, data compiled by Bloomberg show.

Many of these companies are much smaller than those that comprise the Nikkei 225 Stock Average. They also sell fewer products overseas, meaning the yen’s slide has less impact on their profitability.

For utilities and energy companies that import commodities like oil and natural gas, a weaker yen has boosted expenses, curbing income gains. Operating profit for 31 materials companies, including Kobe Steel Ltd. (5406) and Mitsubishi Materials Corp., is forecast to increase 19 percent this fiscal year from 2012, below the growth forecast in other sectors, according to data compiled by Bloomberg.

Virtuous Cycle

There are some signs that Abe’s policies are beginning to change corporate behavior with regards to wages.

Toyota, which employs almost 70,000 workers in Japan, approved the biggest salary bonus in five years in agreeing to a union proposal for a 2013 average bonus of about 2.05 million yen, compared with 1.77 million yen in 2012, the company said March 13. The carmaker’s pay increase follows similar raises by Honda Motor Co. and electronics group Hitachi Ltd.

In one early response to Abenomics, convenience store operator Lawson Inc. said in February that it will raise the basic wage of some employees by about 3 percent. Seven & I Holdings Co. (3382), owner of the 7-Eleven convenience-store brand, said in March it will raise wages of about 50,000 employees at its 54 group companies.

Japan’s wages rose by the most in a year in April, the Labor Ministry said today. Monthly pay including overtime and bonuses rose 0.3 percent from a year earlier to 273,427 yen.

“The most important thing in order to continue with the virtuous cycle is to raise wages,” said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research. “A pay hike is the core for successful Abenomics.”

To contact the reporters on this story: Aaron Clark in Tokyo at aclark27@bloomberg.net; Yuki Yamaguchi in Tokyo at yyamaguchi10@bloomberg.net; Jason Clenfield in Tokyo at jclenfield@bloomberg.net

To contact the editors responsible for this story: Teo Chian Wei at cwteo@bloomberg.net; Frank Longid at flongid@bloomberg.net

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