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Economy

Trump uncertainties cast a pall over Japanese capital spending

Bellwether index points to weaker corporate investment in coming months

A humanoid robot works alongside employees at a factory in Japan. Needs for labor-saving investments in automation and industrial robots seem be dampened by uncertainty over trade policy.   © Reuters

TOKYO -- The shadow of U.S. trade tensions threatens to extend beyond China into Japan as an uncertainty index signals a slowdown in capital spending while machine orders, another indicator, have already flattened out. 

Although relatively unknown, the trade policy uncertainty index has predicted lulls in capital investment several times and is watched by a fair number of economists. The index is calculated based on the frequency that major newspapers mention terms like trade tensions and import restrictions.

A rise in the index indicates that "more companies will likely reduce capital spending within the following months," said Saisuke Sakai at the Mizuho Research Institute.

After the index rose to 452 in November 2011, capital spending began to decline the following summer. Business was affected as political squabbling in Japan over whether to join the Trans Pacific Partnership pushed the index up and Sino-Japanese relations deteriorated over the Senkaku Islands, which are administered by Tokyo but claimed by Beijing as Diaoyu.

The index rose once again after U.S. President Donald Trump assumed office, reaching 706 in January 2017. Trump's brand of protectionism has spread worldwide and the uncertainties are reminiscent of 2011, if not worse. 

Although trade talks between the U.S. and China are continuing, it is unclear whether those discussions will result in a deal as the two countries compete for economic and technological dominance. There are also signs that U.S. will get into a tit-for-tat battle on tariffs with the European Union.

There were no major developments on U.S.-Japanese trade issues during Japanese Prime Minister Shinzo Abe's summit with Trump on April 26. There is a risk for Japan that currency provisions could be brought up again in their next two meetings in May and June.

There is concern that the index, which has sunk back to just under 400, will jump again if Trump takes a more erratic stance as he prepares for reelection in 2020.

Signs of change are already appearing in machine orders, a leading indicator for capital spending. Orders contracted 3.2% on the year in the October-December quarter, the first fall in a year, as China's economy slows. January and February were even worse  at 4.8% on average. Although March figures are not yet available, the three-month total will likely represent a drop on the year.

Domestic orders at Japanese industrial robot maker Yaskawa Electric shrunk 7% in the December-February period from the previous quarter on less demand for servo motors used in machine tools.

"Japan's capital investment may have entered a down cycle," said one Japanese analyst.  

The economic effect of slower capital spending would be widespread. Japan's corporate capital investment rose at an annualized pace of 3% in October-December to 91 trillion yen ($815 billion) on nominal gross domestic product basis. That accounts for both the greatest figure and highest percentage of GDP since 1994, the current benchmark.

Capital spending provided a 0.6% boost to Japan's 0.8% real growth rate in 2018, as such investment becomes an essential pillar of the country's economy.

Capital spending may hold firm thanks to structural needs for labor-saving investments by non-manufacturing industries, including retailers. But with the manufacturing industry vulnerable to trade concerns, "it is difficult to expect capital spending to drive economic growth," said Hiroshi Miyazaki at Mitsubishi UFJ Morgan Stanley Securities.

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