Japan’s Capital Spending Trough May Entrench Recovery

By Jason Clenfield and Tatsuo Ito

Nov. 11 (Bloomberg) -- Japanese companies including equipment-maker Tokyo Electron Ltd. are reporting an increase in orders for factory machinery, a trend that may offer the clearest sign yet the economic recovery is gaining traction.

Machinery makers said they expect orders to rise 1 percent this quarter from the previous three months, the first increase since the January-March period in 2008, the Cabinet Office said today in Tokyo. The rebound follows a quarter in which bookings sank to the lowest level since records started in 1987.

Japanese companies managed to protect earnings during the recession by cutting jobs and slashing investment in plant and equipment, spending that accounted for more than a third of the economy’s growth during its previous expansion. Today’s report suggests the cuts to investment may be over.

“Up until now there have been two missing links in the Japanese economy. One is capital spending, the other is employment,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “Capex is starting to come back.”

The Cabinet Office today raised its assessment of machinery orders, which tend to lead spending on capital equipment by three to six months, saying they are showing signs of bottoming. Orders climbed 10.5 percent in September from a month earlier, the second consecutive gain. The increase, more than twice the pace forecast by economists, was driven largely by bookings from service firms for computers and communications.

The yen climbed after the report, and later erased its gains. It traded at 89.78 per dollar at 4:09 p.m. in Tokyo from 89.76 before the report. The Nikkei 225 Stock Average edged 0.01 percent higher, and has advanced 40 percent from a 26-year low in March.

Tokyo Electron

Tokyo Electron, Japan’s biggest maker of equipment used to make semiconductors, last month reported a narrower-than- forecast loss for the first half of the fiscal year, citing improving demand for chip gear and cost reductions. The company said orders for machines that make chips and flat-panel displays climbed 94 percent in the three months ended Sept 30.

The rebound in capital spending would lend stability to a recovery that has so far depended on temporary factors including government stimulus and a rebound in production spurred by run-down inventories.

Japan’s economic growth accelerated last quarter to a 2.9 percent annualized pace, according to the median estimate of economists surveyed by Bloomberg ahead of gross domestic product figures due for release on Nov. 16. Capital spending likely added to an expansion that began in the second quarter, powered mainly by exports, consumer spending and government outlays, economists said.

Chinese Demand

Growth in China is spurring demand for Japanese products. Reports today showed the expansion in Japan’s biggest market may accelerate, with factory output rising the most in October since March 2008, retail sales climbing 16.2 percent and urban fixed-asset investment up 33.1 percent in the first 10 months.

To be sure, Japan’s business investment is rebounding from record low levels. The failure of consumer demand in the U.S. and Europe to return to pre-recession levels has left Japanese manufacturers burdened with equipment they no longer need. Even after seven months of increasing industrial production, about a third of the country’s factories are still sitting idle.

“Companies are saddled with massive excess capacity,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “You can paint this however you want, but basically our forecast is for capital spending to rebound at fairly moderate pace and for the level to be quite subdued for a long time.”

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Tatsuo Ito in Tokyo at tito@bloomberg.net.