Japanese Economy Helped By Capital Spending

by: Reid K.

Japanese companies are increasing their spending on new capital assets as they observe brisk profits from replacing aging facilities and equipment, leading to more promising economic growth for Japan.

In the January-March quarter, Japan's GDP rose by an annualized 3.9%, the highest number seen since the same quarter back in 2014 where growth had risen by 4.4% due to demand ahead of the sales tax hike implementation last April.

This growth is mainly due to active investments from Japanese companies, as Chief Cabinet Secretary Yoshihide Suga told a news conference on Monday. Companies are starting to increase their domestic capital spending.

Indeed, the number significantly rose from 0.4% to 2.7% on the quarter from preliminary data. Furthermore, the average age of Japanese companies' domestic facilities has risen from 10 to 15 years between 1995 and now.

Preliminary data had undervalued capital spending figures by a considerable amount. A large number of these figures had to be adjusted upward in the revised data.

The numbers that were estimated in May 20 showed that Q1 would mark the first increase in four quarters, when it reality, revised data showed that this quarter was the third straight quarter of growth in corporate expenditures. Overall, revised data was changed from a 0.5% decrease to a 0.4% increase.

Businesses in Japan Have More Incentive

In the past few years, Japanese businesses did not have any incentives to renew their facilities. With contracting domestic demand, an ageing population combined, and a long economic slump, businesses had shied away from renovation.

However, with growing profits and a sustained weak yen, which has been one of Asia's worst performing currencies, more and more companies find an advantage in replacing their facilities that have become uncompetitive.

This recovery can be best illustrated by the electronics industry, which is coming out of a restructuring period. Panasonic's (OTCPK:PCRFY) president Kazuhiro Tsuga said investments in domestic facilities for products that can be exported from Japan will be the number one priority for this fiscal year.

Panasonic plans to increase its capital spending both in Japan and abroad to 285 billion yen ($2.25 billion), representing an increase of 25%.

Toyota Motor (NYSE:TM) is another example. It is looking to boost their global investment by 1.2% to 1.2 trillion yen in the fiscal year 2015. The global automaker plans to invest in both new assembly plants abroad and in existing domestic plants.

This capital spending boom has spilled over to industries other than the manufacturing sector. Mitsubishi Estate (OTCPK:MITEY) is planning on increasing their investment by 81% to 320 billion yen this fiscal year. The company wants to redevelop its domestic properties in Tokyo.

Statistics from the finance ministry shows that capital spending should outpace depreciation costs. Companies are starting to spend their cash that was accumulated during the deflation years, and are breaking their old habit of making minimal investments.

Is the Growth Enough? Is it Sustainable?

However, it must be asked: is this capital spending boom enough to really drive the economy? The answer to this is less clear. Indeed, a leading indicator showed that machinery orders for April-June are projected to decline by 7.4% on quarter.

Furthermore, the Economy Watchers Survey for May shows signs of unsteady economic conditions. According to the survey, the economic sentiment index is set to decline 0.3 points to 53.3. This is due to concerns about material prices rising against a weak yen.

There is a clear trend of companies investing with their abundant cash, but it still remains to be seen whether this will continue to have a significant impact on the Japanese economy. Growth prospects for other countries in Asia are still brighter and more certain.

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