Increased capital expenditure pushes fastest expansion since 2011 fourth quarter, reports Team IFM
Tokyo, June 13: Japan has revised its initial first quarter growth numbers to show an unexpected expansion for the sixth straight quarter, contrary to independent projections of a much slower increase, and analysts said it was not entirely due to heightened activity on the eve of the April sales tax hike.
On Monday, the Cabinet Office said Japan’s GDP shot up 6.7 percent in the first quarter this year from the October-December quarter of 2013. This is a revision of its initial estimate of expansion at an annualised rate of 5.9 percent.
In what has turned out to be the briskest pace of growth since the fourth quarter of 2011, the Cabinet Office data beat The Wall Street Journal and the Nikkei forecast of a slower rate of 5.5 percent upward movement, and a Reuters median forecast of 5.6 percent.
Economists said the rush to ramp up production to meet pre-levy increase sales was not the only reason for the revision, but also reflected higher capital expenditure – the investments made to increase fixed assets or add to existing assets.
“Companies don’t tend to ramp up spending ahead of the sales tax hike,” Mitsumaru Kumagai, chief economist at Daiwa Institute of Research, told Reuters. “So the increase likely reflects improvements in corporate profits and diminishing slack,” Kumagai said.
Capital expenditure recalculated to show a massive 34.2 percent increase from a jump of 21 percent shown in the preliminary GDP estimates released about a month ago. However, the Journal said, the spurt in consumer spending had a lot to do with it, and that “economists expect the economy will contract around 4 percent in the April to June quarter”.
But at the same time, an upbeat Bank of Japan Deputy Governor Kikuo Iwata recently told the Japanese parliament he expected the country’s exports to turn up as advanced economies registered recoveries, and that the economy was cruising towards meeting the central bank’s 2 percent inflation target.
“The Japanese economy will continue growth above its potential rate as a trend as exports turn up and domestic demand remains firm,” Reuters quoted Iwata as telling parliament.
STABILITY SIGNALS
As per the Cabinet Office data, capital expenditure by Japanese companies went up 7.6 percent, as compared to an initial estimate of an increase of 4.9 percent, indicating that Japan’s economy has continued to expand under Prime Minister Shinzo Abe’s growth policies popularly known as Abenomics.
Over the same January-March period, the economy went up 1.6 percent compared with analysts’ prediction of an expansion of 1.4 percent and an initial official estimate of an increase of 1.5 percent expansion.
However, Takeshi Minami, chief economist at Norinchukin Research Institute, warned of rocky days ahead as businesses start feeling the effect of the April hike in the sales tax from 5 percent to 8 percent, which have impacted consumer spending.
“A surge in domestic demand helped Japan achieve high growth in January-March,” Reuters quoted Minami as saying. “But a reactionary slump is inevitable, which means the economy will contract in April-June,” he said.
Moreover, Minani pointed to the weak factory output and household spending, which plummeted at the fastest pace in three years in April following the tax hike.
At the same time, it is also believed the economy will overcome the temporary dips in growth, thanks to the central bank’s “qualitative and quantitative easing” programme it launched in April last year. Under this programme, the BOJ has been funnelling funds into the markets on the hope banks will lend more to companies, which will then in a spiral effect boost wages and capital spending.
BOJ data released on Monday showed that the programme has already started having an effect with bank lending rising 2.3 percent last month from May 2013, an increase for the 31st straight month and reflecting a growth at a faster pace than 2.1 percent in April.
APRIL TUMBLES
Earlier estimates by METI – the Ministry of Enterprises, Trade and Industries – had showed a month-over-month industrial production growth of 0.7 percent in March, as compared to 0.3 percent the preceding month.
The data prompted Prime Minister Abe to assert Japan would reach the 2 percent inflation target, and promised more policy steps and stimulus packages to prop the economy if needed.
In April, manufacturers saw output and new orders declining, both falling for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax.
Alongside, the month also saw the highest rate of growth in payroll numbers since February 2007. Both prices charged and input prices rose in April, with selling prices increasing marginally following a decline in March.
Markit’s manufacturing PMI posted at 49.4 in April, down from 53.9 in March. “This was the first time in 14 months that the Japanese manufacturing sector saw deterioration in business conditions,” Markit said. “Output fell to the greatest extent seen since December 2012.”
The main contributor according to anecdotal evidence was a decline in demand. Indeed, similar to output, new orders decreased, with evidence suggesting the increase in the sales tax was the main factor behind lower new orders, as clients had brought forward purchases in March to avoid paying additional costs the following month.
Alongside, new export business also fell. “The rate of decline was marginal in April, but nonetheless the first reduction recorded in eight months. Solid decline in work outstanding was observed,” Markit said.
Buying capacity declined sharply in April and at the fastest pace since December 2012. Firms commented on a decrease in purchasing activity because of a drop in new orders.
In contrast to the majority of the indexes, Japanese manufacturers saw employment growth for the ninth month running. Moreover, the rate of job creation quickened to the sharpest since February 2007 as companies took on extra staff in anticipation of future workload growth.
“Output and new orders both fell for the first time in 14 months,” said Markit economist Brownbill. “In both cases, Japanese manufacturing companies linked the reductions to the increase in the sales tax.”