---- by Yasuhiko Seki ----
TOKYO (AFX-ASIA) - Second quarter GDP forecasts have been revised down after the Ministry of Finance's quarterly survey on corporate capital spending showed a weaker-than-expected increase, economists said.
Prospects for the future course of capital investment remain mixed, with some economists highlighting a limited spill-over impact of stock adjustments in the manufacturing sector.
Meanwhile, the Nihon Keizai Shimbun reported that real GDP contracted by 1.2 pct over the previous quarter, citing an estimate presented at yesterday's meeting of policymakers of the ruling coalitions by the Cabinet Office.
Prior to the announcement of the MoF survey results earlier today, local economists had forecast GDP would come in at between a fall of 0.3 and 1.8 pct from the previous quarter, with consensus around a 0.9 pct decline.
The MoF survey showed total capital spending by 19,151 non-financial firms rose 2.3 pct year-on-year in the second quarter, after a 2.5 pct rise in the first.
Capital expenditure by manufacturers rose 10.5 pct year-on-year in the second quarter following a 22.6 pct gain previously, while non-manufacturers' capex fell 1.8 pct after a decline of 5.8 pct. While describing the survey outcome as surprisingly solid, the ministry of finance cautioned that the outlook is severe, warning that declining sales in the manufacturing sector are likely to impact on investment spending going forward.
NLI Research Institute economist Akimasa Okada said his house has downgraded its forecast for second quarter GDP to a fall of 1.1 pct from the previous estimate of a 0.8 pct decline to reflect the new data.
"The MoF survey underscored that capital expenditure by manufacturers was beginning to moderate in line with the extent of the deterioration of corporate earnings and in line with production cut-backs," Okada said.
"Until the previous quarter, the implementation of backlog orders held overall investment up despite the production adjustments and worsening of corporate profits."
NLI now estimates that overall capital spending fell 3.2 pct quarter-on-quarter in the second quarter, compared with the 1.0 pct decline expected earlier.
Daiwa Institute of Research senior economist Junichi Makino said his house has downgraded its GDP projection to a quarter-on-quarter fall of 0.6 pct, citing the poor result of the MoF survey.
"Once IT firms make stock adjustments, overall capital investment may begin to move more solidly on the back of continued spending on IT products by non-manufacturers," Makino said.
DIR forecasts second quarter overall capital spending will fall 2.8 pct quarter-on-quarter, compared with its previous estimate of a 0.3 pct decline.
The MoF survey showed investment by the service sector rose 2.8 pct year-on-year in the second quarter, while outlays by the wholesale/retail sector were up 4.9 pct.
"The non-manufacturing sector has not made large investments over past years and they will need to renovate their information systems, which will alleviate downward pressure on overall capital spending," Makino said.
Nomura Research Institute, which had the most optimistic GDP forecast of just a 0.3 pct fall for the second quarter, cut its estimate to a decline of 0.4 pct and its forecast for capex to a fall of 3.0 pct from 0.9 pct previously. At the same time, "given the earnings environment surrounding non-manufacturers, it is hard to expect overall capital spending to fall into a serious downtrend, even when manufacturers are rushing to cut investment," economist Masaki Kuwabara said.
The MoF survey showed that pretax profit in the non-manufacturing sector rose 17.1 pct year-on-year in the second quarter, while pretax earnings by the manufacturing sector fell 21.2 pct.
However, Sumitomo Life Research Institute senior economist Kazuyuki Tazawa warned of sustained sluggishness in corporate capital spending, citing steady declines in cashflow.
"Over the past years, high levels of cashflow have supported robust capital spending but they are beginning to come down due to financial-system and earnings problems, eventually affecting investment by non-manufacturers.
"If this happens, we may not see any recovery in capital spending until around the April-June quarter of next year." The MoF survey showed cash-on-hand as a proportion of net assets fell to 11.8 pct in the second quarter from 13.0 pct last year, with the figure for non-manufacturers declining to 11.1 pct from 11.9 pct.