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Japan Capex Slides; Quarter Growth Seen Hard Hit

Japanese corporate capital spending fell the most in five years, fourth-quarter figures showed, pointing to a sharp downward revision in growth and reinforcing expectations of a rate cut later this year.

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The 7.7 percent slide in capital spending from a year earlier, almost four times the expected fall, will see GDP growth revised down by the government next week, economists said, adding to fears about the economy ahead of a Bank of Japan rate review this week.

"Rising raw material prices hurt manufacturers' earnings, while slack domestic demand, slow sales and the negative impact of tighter construction rules hit non-manufacturers," said Naoki Iizuka, a senior economist at Mizuho Securities. "We still need to crunch numbers to be sure, but Japan's October-December GDP may be revised down to negative growth given the weak capital spending figures."

The government's initial estimate of fourth-quarter growth had been a surprisingly robust 0.9 percent. A revision down would be more in line with economists' forecasts for a sharp slowdown in growth, and possible recession, in both the United States and Japan this year in the wake of the U.S. subprime housing crisis.

Swap contracts on the overnight call rate are pricing in roughly a 50 percent chance that the BOJ will lower rates by the end of the year, a jump from around a 20 percent chance seen a
week ago.

The sharp fall in capex was was the third straight quarter of annual decline and the sharpest drop since a 12.2 percent fall reported in the year to July-September 2002, Ministry of Finance
figures showed.

Worst hit were the IT and leasing sectors, as capital spending among non-manufacturers fell 12 percent from a year earlier, while manufacturers -- many of whom are major exporters
-- spent a little more.

"Companies' drive to invest will likely continue to weaken in the current January-March quarter in light of sluggish domestic demand and worries over the outlook for the global economy," said
Takeshi Minami, chief economist at Norinchukin Research Institute, who suggested the GDP growth figure for the quarter might be slashed by a third to 0.6 percent.

Financial markets have been more focused on the global market jitters but the weak data weighed on stocks, as the Nikkei 225 Average fell slightly.

"Companies' profits have been already in a downtrend since the middle of last year, and today's data shows that companies' capital spending is peaking following sluggish profits," said Junko Nishioka, an economist at ABN Amro Securities.

Squeezed

While companies saw sales rise 2.3 percent, their recurring profits fell 4.5 percent in a sign that rising crude oil and other raw material costs were hurting their bottom line.

Revised GDP figures for the fourth quarter are due out next Wednesday. The preliminary 0.9 percent growth figure -- an annualized rate of 3.7 percent -- had been double the forecast
rate and was driven largely by strong capital spending and exports.

But economists have already been pointing to fears of a U.S. recession, weakening industrial output and consumer sentiment at home, and shaky financial markets as factors to cloud Japan's economic outlook.

The BOJ's policy board is widely expected to sit tight on rates at Governor Toshihiko Fukui's last scheduled rate review meeting on Thursday and Friday -- a meeting that has been
overshadowed by political bickering about his successor.

With two weeks to go until Fukui retires, the government and opposition have still not agreed who should replace him.