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Economy

Japan's July-Sept negative growth to fall further, experts say

Weak capital expenditure seen driving GDP contraction of about 2%

 Third quarter results will provide more clues as to where the Japanese economy is headed. (Photo by Kosaku Mimura)

TOKYO -- Weak capital expenditure for the July-September period has Japanese economists believing the country's negative growth in the quarter was worse than previously forecast.

Some experts say the revised annualized GDP would stand at negative 2%, as opposed to the preliminary figure of negative 1.2%.

Statistics released on Monday by the Ministry of Finance indicate that aggregate capital expenditure -- excluding software -- across all but the financial and insurance sectors decreased 4.0% in the quarter from the previous three months.

The first slide in five quarters is partly attributed to the comparison with high growth in the April-June period. But economists were quick to note that it may be a sign that Japan's corporate spending -- a key economic driver -- may be starting to slow.

Capital expenditure in manufacturing fell 5.3%. Notably, the figure for information and communications equipment, which showed robust growth in the April-June period, slowed in the second quarter.

Other factors were also cited by the ministry, including a 3.3% drop in spending by non-manufacturers and weakening demand for repair of power generation equipment.

The Cabinet Office will reflect the latest capital expenditure figures in the revised GDP for the July-September period, to be released next Monday. The preliminary GDP figure contracted 0.3% from the previous quarter, translating to an annual shrinkage of 1.2%.

According to economists, the finance ministry's statistics indicate that the economy will continue shrinking.

Ryutaro Kono of BNP Paribas Securities said in a report on Monday that he "expects a significant revision down" in the July-September period to 2.5% annualized contraction. Yoshiki Shinke from Dai-ichi Life Research Institute predicts 2.1%.

Meanwhile, Hiroshi Miyazaki of Mitsubishi UFJ Morgan Stanley Securities says the figure could show annualized shrinkage of around 2%, while Kentaro Arita of Mizuho Research Institute sees 1.9%.

Less pessimistic was Takeshi Minami of Norinchukin Research Institute, who predicts negative GDP growth for the quarter will be revised down to 1.7%.

The third quarter could show whether the capital spending dip was just a one-off, or the start of an overall downward trend.

Economists say that weak second quarter investment is partly a reaction to strong expansion in the previous quarter. Some are betting investment to bounce back in the third quarter.

Given signs of slowing growth in both production and exports, however, "It is unclear whether investment will again grow vigorously in the coming months as in the recent months," warns Miyazaki.

While the outlook for capital investment has clouded, corporate earnings remain strong.

Corporate sales jumped 6.0% in the July-September period for the eighth consecutive quarter of expansion, while pretax profits rose 2.2% for the ninth straight quarter of growth.

Months of strong profits have left Japanese companies with massive cash reserves. Retained earnings in the quarter -- or internal reserves -- surpassed 450 trillion yen ($3.96 trillion) for the first time, hitting 453 trillion yen. This represents a 16.5% surge from a year earlier, marking the largest on-year rise since the October-December period of 1980.

A slow rise in labor costs coupled with healthy profits is also a factor behind swelling cash reserves.

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