Weak Capex May Push Japan into Deeper Contraction

Japan's economy may have shrunk even more deeply into recession in the fourth quarter, a survey on capital expenditure signaled on Thursday, as the export-fueled economy grapples with the global downturn.

AP

An initial estimate of Japan's fourth-quarter GDP showed it shrank a record 3.3 percent and the survey suggests that contraction may have been even bigger.

With all Group of Seven (G7) economies contracting and world trade shrank sharply, profits at Japanese manufacturers are evaporating, hitting at the heart of the growth engine for Japan, the world's second largest economy.

Economists expect a further big fall in Japanese GDP for the first quarter of 2009 and, with domestic consumption also weak, they don't see any recovery until later in the year.

"Fourth-quarter GDP is likely to be revised down, going by these capital spending figures," said Hiroshi Shiraishi, economist at BNP Paribas. "Current profits in major manufacturing sectors have virtually evaporated, although that was largely expected, going by recent media reports."

However markets looked past the figures to focus on signs of a turnaround in China's economy, after a key gauge of Chinese manufacturing improved for the third month in a row.

Tokyo's Nikkei 225 Average rose 2 percent and Japanese bond futures edged lower on hopes that China's data was a sign of a global recovery.

Capex Stalls

The fourth quarter for Japanese companies looked bleak, however, as exports tumbled and they wound back capital expenditure as factories cut production and staff.

Japanese private sector spending on plants and equipment fell 17.3 percent from a year earlier, the Ministry of Finance survey showed, a slightly bigger fall than the market median forecast for a 16.6 percent slide.

It was the largest fall in the comparable data going back to July-September 2002, although the fall was exaggerated by changes in accounting rules on leasing.

The data is closely watched as it is used in calculating revised October-December GDP, due out on next Thursday at 8:50 a.m..

Economists said Thursday's reading suggest the capex component of GDP will be revised down and perhaps the overall GDP figure, too.

A preliminary estimate showed the world's second-largest economy shrank 3.3 percent, the biggest contraction since it was hit by the first oil crisis in 1974 and its third straight quarters of contraction.

The economy is expected to keep shrinking for at least two further quarters as Japanese manufacturers slash production to shrink piles of unsold goods as global demand for cars and consumer electronics plunge.

There are some hopeful signs, with major carmakers looking to restore some of the production cuts in coming months, but a rapid recovery is not on the cards.

"I expect the pace of contraction to slow gradually in the coming quarters. But we'll probably have to wait until the fourth quarter of this year to see positive growth," said Junko Nishioka, chief economist at RBS Securities.

The ministry survey showed Japanese companies' profits fell 64.1 percent from the same quarter last year.

To cope with what many company executives describe as unprecedented downturn, leading exporters such as Toyota and Sony have cut jobs, raising fear that already weak domestic consumption will slide.

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Prime Minister Taro Aso has proposed a 75 trillion yen ($769 billion) package to shore up the economy, but the increasingly unpopular leader is facing a divided parliament and calls for an early election that could delay fresh policy moves.

The country's central bank has cut interest rates twice to 0.10 percent, and came up with a flurry of measures to support corporate finance since late last year.

While some of the BOJ's measures have helped to alleviate some of the tensions in financial markets, credit spreads remained high as the bleak economic outlook fans fear of rising bankruptcies.

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