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Japan 2Q GDP outlook bleaker after capex survey

Reuters - Saturday, September 6

By Yuzo Saeki

TOKYO, Sept 5 - The outlook for Japan's overall economic activity in April-June appears to be bleaker than initially estimated after an unexpected slide in corporate capital spending that fuelled recession fears.

A Reuters poll found on Friday that economists see a median 1.0 percent contraction in the second quarter, as a weak reading in a survey of companies' capital spending plans prompted them to revise down their forecasts.

Japanese corporate capital spending unexpectedly fell 6.5 percent in the second quarter from a year earlier, a survey by the Ministry of Finance showed.

"A deterioration in export conditions has impacted the domestic economy and home demand-oriented non-manufacturers' appetite for capital investment is weakening more than expected," said Takumi Tsunoda, a Shinkin Central Bank Research economist.

An early estimate of Japan's gross domestic product showed the economy shrank 0.6 percent in the quarter. Revised figures are due out on Sept. 12.

Private capital investment is seen revised down sharply to a fall of 2.5 percent from an initial estimate of a 0.2 percent decline, the poll showed.

With pessimism over the health of the global economy pervading in financial markets, the data underscored the pain that high raw material costs have been inflicting on Japan's economy, which is already seen as in or near a recession.

The capital spending figures came out as the yen surged to a 13-month high against a sliding euro on Friday, with investors fleeing leveraged carry trades amid falling share markets and rising risk aversion. <FXNEWS> [FRX/]

The Nikkei share average <.N225> slid nearly 3 percent while Japanese government bonds <2JGBv1> soared as investors fled to the safety of sovereign debt. <FINEWS> [.T]

Economics Minister Kaoru Yosano, who plans to run in the race for Japan's next leader after outgoing Prime Minister Yasuo Fukuda abruptly quit on Monday, said the clouds over the Japanese economy should clear once overseas economic conditions improve.

"We do not need to be pessimistic about the Japanese economy per se," he said.

The sharp fall in capital spending surprised market players who had forecast a 2.5 percent increase.

A one-off change in accounting at leasing firms was behind the fall, a finance ministry official said, with such firms no longer including the purchase of equipment for leasing out.

Capital spending in April-June increased 3.8 percent from a year earlier if leasing companies were excluded, the official said, but analysts took scant comfort.

"Commodity prices were rising until mid-July so that will weigh on corporate revenues until July-September. After that, the negative impact from high raw material costs will gradually ease," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"But that doesn't mean troubles for Japanese companies are over, as they won't see sales increase much with weakness in the U.S. and European economies spreading to emerging economies."

Corporate capital spending had been a key driver of Japan's economy but has lost steam recently as profits have been eroded by high raw material prices, while a global slowdown has taken a toll on overseas sales.

"Now, on top of the costs factor, there is the 'top-line' problem as sluggishness in exports became apparent in the April-June quarter," said Kyohei Morita, chief economist at Barclays Capital Japan.

The ministry's quarterly survey also showed corporate recurring profits fell 5.2 percent in April-June from a year earlier, while sales were down 0.7 percent.

The April-June capital spending data is used to calculate revised GDP data for the same quarter.

Analysts expect lingering economic uncertainty at home and abroad to keep the Bank of Japan from raising interest rates from the current 0.5 percent at least until early next year.

Japan measures a recession as a downturn in the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction.

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