Japan’s Capital Spending Falls the Most in Six Years

By Jason Clenfield

Dec. 4 (Bloomberg) -- Japanese businesses cut investment at the fastest pace in six years last quarter as the global financial crisis darkened the outlook for exports.

Capital spending excluding software fell 13.3 percent in the three months ended Sept. 30, a sixth quarterly decline, the Ministry of Finance said today in Tokyo. Profits tumbled the most in seven years.

Japan’s first recession since 2001 is deepening as companies cut production, jobs and spending in anticipation exports will keep falling. Canon Inc., which is predicting its first full-year profit drop since 2000, said last month it will delay construction of a 100 billion yen ($1 billion) factory.

“There’s no sign of a recovery on the horizon,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The downturn is starting to look worse than the last recession,” when the dot-com crash caused exports and production to plunge.

The yen traded at 93.26 per dollar as of 10:28 a.m. in Tokyo from 93.18 before the report. Japan’s currency has gained 14 percent since September, adding to exporters’ woes by lowering the value of overseas sales and undermining the competitiveness of their cars and electronics. The Nikkei 225 Stock Average rose 0.5 percent; it’s down 47 percent this year.

Today’s report means the economy’s quarter-on-quarter contraction was sharper than the 0.1 percent estimated last month, said Muto at Sumitomo Mitsui. The government will use the capital spending figures to revise gross domestic product Dec. 9.

Profits Plunge

Profits plunged 22.4 percent from a year earlier, the biggest drop since the fourth quarter of 2001, as oil and commodity costs climbed to a record. Sales slipped 0.2 percent. Spending dropped more than the 10.9 percent economists expected.

“The sharp fall in profits and spending indicates more bankruptcies and cuts in wages and employment are around the corner,” Naoki Iizuka, senior economist at Mizuho Securities Co. in Tokyo. “Yen appreciation and rapidly cooling global demand will continue to hurt exporters, worsening the recession.”

Panasonic Corp., the biggest maker of consumer electronics, said last week that gains in the currency would shave 22 billion yen from profit this year. Canon, which makes 80 percent of its sales abroad, last month said it will cut output and postpone building a printer-cartridge factory in Oita Prefecture, southern Japan.

Exports fell in October at the fastest pace in more than seven years, and companies planned the steepest production cuts in 35 years in November.

Firing Workers

Automakers including Toyota Motor Corp., Isuzu Motors Ltd. and Mazda Motor Corp. last month announced they would fire temporary staff, who economists say may only be the first wave of workers to lose their jobs.

“This is this just the start of the employment correction,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. He said the pace of layoffs should peak in the second half of 2009, putting pressure on consumer spending and hurting small and midsized businesses, whose customers are mostly domestic.

Banks are also becoming more reluctant to lend, making it harder for smaller companies to fund investments. The Bank of Japan this week extended the types of corporate debt it accepts from lenders in an effort to funnel more cash to businesses.

Central bank Governor Masaaki Shirakawa said Japan’s money market remains “strained” even after his board lowered the key lending rate to 0.3 percent last month. The Tokyo three-month interbank offered rate, or Tibor, a measure of the cost of lending between banks, rose to a 10-year high this week.

“Banks can’t extend loans to small businesses,” said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. The credit crunch, like the collapse in Japan’s exports, “is also a spillover from overseas,” he said.

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