Capital Expenditure in Japan May Be Running Out of Steam

  • Economy is already struggling with weak exports, consumption
  • Updated GDP data next week may show contraction was deeper

Capital expenditure is shaping up as another area of concern for Japan as economists trim their forecasts for this key measure of economic health.

With exports and household spending already in decline, Japan can ill-afford any weakness in expenditure from the corporate sector. Yet with the economy contracting in the final three months of last year, volatility in financial markets and gains in the yen eroding the competitiveness of Japanese goods overseas, companies may be thinking twice before spending.

A snap survey by Bloomberg shows the government will probably revise down business investment data to a gain of 1.2 percent for the three months ended Dec. 31, from an initial estimate of 1.4 percent. The median forecast from 15 economists also shows that GDP may be revised to a contraction of 1.5 percent when it releases updated gross domestic product figures next week, from an initial projection of a 1.4 percent drop.

“Going forward, there are downside risks to Japan’s economy,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo. “Capital spending wasn’t that bad up to the fourth quarter but the turbulence in financial markets may hurt business sentiment and prompt companies to hold off spending.”

Private consumption was the biggest contributor to the economy shrinking at the end of 2015. It was the fifth quarterly contraction since Shinzo Abe became prime minister in late 2012.

Capital spending excluding software was unchanged in the October-December period from the previous quarter, when it gained 5.7 percent, according to a finance ministry report released on Tuesday. From a year earlier, it rose 8.9 percent, slowing from an 11.2 percent advance in the previous three months. Tuesday’s data will be reflected in a revision of capital spending that feeds into an update of GDP to be released March 8.

One of the successes of Abenomics has been strong -- and sometimes record -- corporate profits, supported by a weaker yen and lower oil prices. So figures Tuesday also showing the first drop in corporate profits since 2011 and a decline in corporate sales were worrisome.

The yen has strengthened 5.5 percent this year versus the dollar after rapid depreciation when Abe first came to office.

While the global economy is slowing and the yen is strengthening this year, company earnings are likely to slide from their peak, said Hiroaki Muto, chief economist at Tokai Tokyo Research Center Co.

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