TOKYO, June 5 - Japanese firms cut back on new investment in the first quarter of this year, a government survey showed on Thursday, raising the possibility that the world's second-largest economy may have contracted during that period. The survey showed firms cut capital spending in January-March by 3.0 percent from a year earlier, in contrast to a 1.9 percent rise shown in the initial gross domestic product (GDP) estimates last month. Because the rise in capital spending was the main reason Japan's GDP growth held at zero in the initial first-quarter figures, some analysts now expect the revised data due out next week will show the economy contracted by as much as 0.3 percent.
"It seems that uncertainty due to a looming Iraq war among other things made corporations hold back on capital spending," said Mamoru Yamazaki, chief economist at Barclays Capital. "There is a high possibility that the capital spending figures in the revised GDP will be lower than the original estimates and that the GDP reading will show a contraction." With signs growing that the global economy is struggling in the second quarter in the wake of the Iraq war and the SARS virus in Asia, the possibility of a fifth recession -- defined as two consecutive quarters of negative growth -- in 11 years is looming larger for Japan. Companies are already feeling worse about their business prospects in the April-June period, a second Ministry of Finance poll showed, even though they expect sales and profits to rise in the business year that started in April. The survey put the headline sentiment index for April-June at minus 10.3, compared with minus 6.8 in January-March as companies struggled with deflation, slow domestic demand and a fall-off in exports, one of the economy's main props.
JOB LOSSES
While profits are seen rising 9.8 percent in the 2003/4 fiscal year, much of the growth is coming from cost cuts rather than improved business. Firms see sales rising only 0.4 percent. Cost-cutting often means job losses, which have a knock-on effect on consumer spending, one of the relatively firm parts of the Japanese economy of late. "There's a strong possibility that the gentle recovery in the domestic economy has reached a turning point in the first quarter," said Tetsuro Sawano, senior fixed income strategist at Mitsubishi Securities. A recent poll of domestic financial institutions showed many think Japan will go into recession this year, while the International Monetary Fund on Wednesday called for tough, urgent action to rescue an economy it saw facing sluggish growth. A MOF official told a briefing that the surveys were conducted at a time when the spread of SARS in Asia -- the destination for 40 percent of Japan's exports -- was at its peak and when stock prices in Japan were near historic lows. "Some manufacturers cited the effects of SARS on their business in the sentiment survey," the official said. "Stock prices were in the 7,000s (on the Nikkei average <.N225>) at the time and this also had some effect on sentiment." For July-September, companies put the sentiment index at minus 4.1, down from a positive 1.7 they forecast in the previous survey in March.
"Given the latest indications that global demand in the second quarter was weaker overall amid lingering concern about the Iraq war and the impact of SARS, the prospects for the near term are not very encouraging," said Ryo Hino, an economist at JP Morgan. The sentiment survey covered 8,451 companies, of which 3,854 were large firms capitalised at more than one billion yen ($8.42 million). The corporate earnings and spending survey covered 18,128 companies. ($1=118.83 yen)//