Photographer: Kimimasa Mayama/Bloomberg

Japan's Capital Spending Jumps, Raising Chances of GDP Upgrade

  • Final reading on gross domestic product is due next week
  • Capital spending data last year led economists astray

Capital spending by Japanese companies surged the most in eight years in the third quarter, raising the possibility that the economy may not have fallen into a recession.

According to data from the finance ministry Tuesday, capital spending jumped 11.2 percent in the three months ended Sept. 30 from a year earlier. That could bode well for an upgrade when a final reading on third-quarter GDP is released next week, although economists were led astray by business investment data last year.

A surprise gain in the capital spending figure from the finance ministry in 2014 prompted economists to forecast that the recession Japan had slipped into wasn’t as bad as initial indications. In the end, it proved to be deeper than expected, owing in part to differences in the way the ministry and the Cabinet Office treated investment data.

Fast forward to 2015 and again there are strong capital spending numbers, after news last month that Japan slipped into a midyear recession. Yoshiki Shinke, an economist at Dai-Ichi Life Research Institute, and Taro Saito of the NLI Research Institute in Tokyo said that this time around the strength of the capex figures is compelling.

“It’s too early to say Japan’s economy has bottomed out but I’m comfortable to say it has stopped deteriorating,” Shinke said. “The surge in capital spending makes it almost certain that the GDP data will be revised up.”

Economists at JPMorgan Chase & Co, Barclays Plc and BNP Paribas SA have changed their views and now estimate that Japan didn’t fall into a recession in the third quarter.

New Estimates

JPMorgan says that GDP probably grew 0.3 percent on an annualized base between July and September while Barclays projects 0.7 percent expansion and BNP sees a 0.2 percent increase, according to notes released after the finance ministry data Tuesday.

The initial data for GDP indicated that the economy shrank 0.8 percent in the third quarter, following a 0.7 percent drop in the second quarter and meeting the common definition of a recession, which is two consecutive quarters of contraction.

The Nikkei 225 Stock Average rose for the first time in three trading days and closed at the highest since Aug. 20.

NLI’s Saito said the finance ministry report “cements a view that Japan’s soft patch is over and the economy is getting back on a recovery path.” It also backs the central bank’s view that the economy is in a “virtuous cycle” and headed for improvement, he said.

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