March 2, 2020 / 2:40 AM / a month ago

Weak Japan capex fuels recession fears as coronavirus slams activity

TOKYO (Reuters) - Japanese companies slashed spending on plant and equipment in the fourth quarter of last year, heightening recession fears as the coronavirus outbreak and a global slowdown pile pressure on the export-reliant economy.

FILE PHOTO: Humanoid robots work side by side with employees in the assembly line at a factory of Glory Ltd., a manufacturer of automatic change dispensers, in Kazo, north of Tokyo, Japan, July 1, 2015. REUTERS/Issei Kato

Capital spending has been a bright spot in Japan’s fragile economy, the world’s third largest, driven by investment in urban development and labour-saving technology, automation and the high-tech sector to cope with labour shortages in the ageing society.

However, analysts said the momentum will wane as business confidence and appetite for investment are hurt by the coronavirus’ damaging impact on activity in China - Japan’s largest trading partner and the driver of global trade.

Capital spending slumped 3.5% in the last quarter from the same period a year earlier, weighed by slowing chip-making investment and weaker global demand for cars, Ministry of Finance (MOF) data showed on Monday. It was the first decline in 13 quarters, reversing from the prior quarter’s 7.1% gain.

On a seasonally adjusted basis, business expenditure declined 4.2% quarter-on-quarter in the October-December period, the data showed.

The data will be used to calculate revised gross domestic product (GDP) figures due March 9, with some economists expecting a slight upward revision due to contribution from inventory while capital spending is set to be revised down.

“The big contraction in the October-December period will remain largely unchanged as the sales tax hike dented private consumption, global slowdown curbed external demand and sluggish exports and output reduced capital expenditure,” said Toru Suehiro, senior market economist at Mizuho Securities.

“Service-sector and private consumption likely slowed further in the first quarter due to the spreading coronavirus outbreak, pushing the economy into a technical recession.”

TECHNICAL RECESSION

Monday’s capex data follows a preliminary estimate that Japan’s economy shrank an annualised 6.3% in the last quarter.

That marked the deepest contraction in almost six years as a sales tax hike hit consumer and business spending, raising the risk of a recession as the widening fallout from the virus epidemic weighs on output and tourism.

The gloomy GDP data was followed by a separate indicator that showed a 2.1% drop in core machinery orders - a volatile data series serving as a leading indicator of capital spending - in the last quarter. Manufacturers anticipate a further 5.2% drop in the January-March period.

Manufacturers’ business spending fell 9.0% from a year earlier, according to Monday’s survey, conducted among firms with capital ranging from 10 million yen ($92,533) to 1 billion yen or more. It followed a 6.4% gain in the previous quarter.

Service-sector spending fell 0.1% year-on-year, following the third quarter’s 7.6% increase.

Corporate recurring profit decreased 4.6% in the October-December quarter from a year earlier, falling for the third consecutive quarter, due to declining demand for cars in and out of Japan, and sluggish overseas sales of construction machinery.

Sales dropped 6.4% year-on-year in October-December, down for the second straight quarter and slowing further from the previous period’s 2.6% decline.

Reporting by Tetsushi Kajimoto; Editing by Christopher Cushing & Shri Navaratnam

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