Japan’s capex spending increases could help shrink the economy

(Bloomberg) — Japan’s businesses increased investment modestly over the summer as profits continued to grow in a sign of resilience, even as the economy contracted.

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Capital expenditure on goods excluding software rose 0.3% in the three months to September compared to the previous quarter, the finance ministry said on Friday. This data is then calculated as revised GDP figures for the period. Earlier reading the economy contracted at a 2.1% annual pace.

The latest capex figures were more encouraging than similar figures in the third-quarter gross domestic product figures, which showed a 0.6% decline in business investment over the quarter. The second GDP review is due on December 8. Finance ministry data showed the company’s profit rose 20.1% in the quarter from a year earlier, beating consensus estimates.

The capex and profit figures could be an encouraging sign for the Bank of Japan, as the results show that firms are likely to continue with strong wage increases. Officials are watching for signs that corporations are willing to put more profits into workers’ pockets, which could allow the BOJ to ease policy stimulus.

However, Friday’s figures were not as strong as forecasts from the BOJ’s Tangen survey, which said large firms plan to increase spending by 13.6% this fiscal year.

„The BOJ’s Tangan shows strong capital investment plans, but they are not yet fully operational,” said Takeshi Minami, an economist at Norinchukin Research Institute. „Firms are cautious given their concerns over foreign economies.”

Separately, data from the Labor Ministry showed that the job market strengthened in October, another mildly positive sign for the central bank. The unemployment rate fell to 2.5%, the lowest since June. The jobs-to-applicants ratio rose to 1.30, meaning 130 jobs were offered for every 100 applicants.

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Along with the capital spending figures, the data suggests that companies may not have been as gloomy about their prospects in the summer as previously thought. Even so, economists are still concerned about the strength of Japan’s sputtering economy and whether the BOJ can gain enough momentum to pull back stimulus.

Some analysts still warn that GDP could contract again in the current quarter, pushing the economy into a technical recession as foreign economies slow and consumer spending remains weak in the face of inflation.

What Bloomberg Economics Says…

„Japan’s October jobs data suggests hiring demand is slowly strengthening — and that could be encouraging for the Bank of Japan, which wants brisk wage growth to lift prices.”

– Taro Kimura, economist

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Investment data showed a rebound in the services sector on the back of increased consumption by inbound tourists. The number of foreign visitors to Japan has grown sharply this year and returned to pre-Covid levels in October.

Growth in investment in the services sector outpaced the numbers for manufacturing, but persistent inflation may deter spending by households from investing in those firms for the foreseeable future.

„I don’t think we’ll see service companies increase capital investment much without a jump in consumer spending,” Minami said. „Wage increases are happening, but they are not yet supporting consumption.”

Minami expects the results to provide a small boost to revised gross domestic product, while the data will show the economy contracted in the third quarter.

Also read: Japan’s economy shrinks, BOJ support and the case for government stimulus

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Gains in exports have been in the single digits for most of this year as demand has weakened, particularly in China, Japan’s main trading partner. Imports of raw materials are growing at a very slow pace this year and overall imports are marginally declining due to lower domestic demand.

Earlier in the week the government passed a supplementary budget to fund a new stimulus package for the economy, and the BOJ is expected to maintain its key policy framework, including negative interest rates, when its committee meets later this month.

(Adds economist’s comments, more details from report)

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