Japan’s capital spending prolongs decline as companies tighten purse strings

  • Q1 investments -7.8% yr / yr, seasonally adjusted -0.4% qtr / qtr
  • Investments by manufacturers -6.4% year / year, non-manufacturers -8.5%
  • Ordinary profits + 26.0% year / year, sales -3.0%

TOKYO, June 1 (Reuters) – Japanese companies cut spending on factories and equipment for the fourth consecutive quarter in January-March, as the economy struggles to shake off the coronavirus pandemic.

Weak business spending is likely to worry policymakers who hope that strong domestic demand can help make the country’s economic recovery more sustainable.

Data from the Ministry of Finance (MOF) released on Tuesday showed capital spending in the first quarter fell 7.8% from the same period last year, led by lower investment in transportation equipment , electrical machinery and real estate.

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This is the fourth consecutive quarter of annual decline in investment spending, following a 4.8% contraction in the last quarter of last year.

“The figure gives a low impression, but the GDP was already low originally,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

A separate private-sector survey Tuesday showed Japanese factory activity expanded in May, largely on strong external demand, but at a slower pace.

The world’s third-largest economy slipped back into decline in the first quarter, as slow vaccine rollouts and repeated emergency restrictions to stop a resurgence of infections hurt domestic demand.

The investment data from the Ministry of Finance, which will be used to update the gross domestic product (GDP) figures for the first quarter due on June 8, would probably not have a major impact on the estimate of the growth, analysts said.

Some companies have been seen to postpone unnecessary investments in favor of holding cash, a finance ministry official said.

“Non-manufacturers have likely built up cash positions rather than committing to spending to bolster security, pushing their capital spending plans beyond year-end,” said Takeshi Minami, economist in chief at the Norinchukin Research Institute.

SLOWING RECOVERY

After rebounding from last year’s slump, driven by a strong recovery in exports, some analysts fear the Japanese economy may fall back into recession in the current quarter due to prolonged coronavirus restrictions.

A preliminary estimate found that the Japanese economy contracted 5.1% on an annualized basis in the first quarter as households cut spending and export growth slowed sharply. Read more

The latest MOF survey showed that manufacturers’ business spending fell 6.4% from a year earlier, posting a smaller contraction than the 8.5% drop in the previous quarter.

That of companies in the service sector fell 8.5% year-on-year, following a 2.6% drop in the previous quarter.

Weaker than expected industrial production and retail sales figures on Monday showed that the economic recovery remains dependent on foreign demand. Read more

Capital spending fell 0.4% in January-March from the previous quarter on a seasonally adjusted basis, MOF data showed.

Recurring business profits rose 26.0% in January-March from a year earlier, up for the first time in eight quarters, while sales were down for a seventh consecutive quarter, down 3.0%.

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Reporting by Daniel Leussink; Editing by Sam Holmes

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