Japan Capital Spending Fell Last Quarter on Oil Costs

By Jason Clenfield

Sept. 5 (Bloomberg) -- Japanese businesses cut investment in the second quarter amid record oil and commodity prices and a global slowdown that damped demand for the country's exports.

Capital spending excluding software fell 7.6 percent in the three months ended June 30, a fifth straight quarterly decline, the Ministry of Finance said today in Tokyo. Profits fell 5.2 percent. The government will use today's report to revise its gross domestic product figures on Sept. 12.

Stocks fell and bonds rose on concern the drop in spending will delay a recovery after the world's second-largest economy shrank the most in seven years last quarter. U.S. jobless claims fell more than economists estimated and German factory orders declined, reports showed yesterday, indicating the global slowdown may deepen.

``The headline number is extremely bad,'' Koji Shimamoto, chief strategist at BNP Paribas in Tokyo, told Bloomberg Television. ``Not only the U.S., but Japan, Europe and emerging economies are also experiencing a downturn, fueling concern that global growth will slow further.''

The Nikkei 225 Stock Average slid 2.5 percent to 12,248.83 as of 9:22 a.m. in Tokyo, after yesterday closing at the lowest level in five months. The yield on Japan's 10-year bond fell 6.5 basis points to 1.435 percent.

Weakening demand at home and abroad has damped demand for Japanese products, and record energy and material costs have eroded profits, reducing the incentive for companies to spend.

Nippon Paper

Nippon Paper Group Inc. and Oji Paper Co. will this month reduce output of paper used in catalogs because of weaker demand from Japanese retailers and real estate companies, the Nikkei newspaper reported, without saying where it got the information.

Business spending, which was calculated in the preliminary gross domestic product report using incomplete data, fell 0.2 percent from the previous quarter. Shimamoto said today's numbers show the government will probably have to revise down the capital spending component of the revised GDP report.

Still, oil prices have eased 26 percent since reaching a record in July, improving the outlook for Japanese businesses whose profits have declined for four quarters. After contracting in the three months through June, the world's second-largest economy has shown signs of recovery: exports, industrial production and housing starts all rose in July.

``I think we've seen the worst of it,'' Takuji Okubo, senior economist at Merrill Lynch & Co. in Tokyo, said before today's report. Concern about a sharp slowdown among emerging markets is ``overdone,'' he said, citing growth in China, which has overtaken the U.S. as Japan's top export customer.

OECD

The Organization for Economic Cooperation and Development said this week that Japan would outpace every major economy in recovering from the global slowdown. Japan's economy shrank an annualized 2.4 percent last quarter, according to the government's preliminary report released Aug. 13, led by a drop in exports and consumer spending.

Bank of Japan Governor Masaaki Shirakawa said last week the economy is ``unlikely to experience a deep adjustment phase.'' He said Japan is more resilient than in previous slowdowns because companies have shed excess workers, capacity and debt.

Sanyo Electric Co., Japan's largest maker of rechargeable batteries, said this week it will build a new domestic factory to meet demand for batteries used in portable electronics. The company is already working on construction of another plant near Osaka that will start operations in the first half of 2009.

``Japan hasn't had the credit crisis and it hasn't had the collapse in housing prices that are the bigger problems in the U.S. and much of Europe,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``The economy will pick up as the inflation shock fades. The second-quarter data were clearly as bad as it gets.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net