By Max Sato

TOKYO (MNI) – Japan’s economic growth in the first quarter of 2010
is expected to be revised down next week from an initial estimate of
near 5% annualized growth after a government survey showed depressed
business investment, economists said on Thursday.

But even after a downward revision to a range of 3.5% to 4.0% in
real GDP, it will remain high for Japan (the Bank of Japan estimates the
potential growth rate at 0.5%), and given the recent recovery in sales
and profits in many sectors, the economy should perform well for the
rest of the year, they said.

Preliminary data released last month showed that the gross domestic
product expanded a real 1.2% in January-March from the previous quarter
(an annualized 4.9%), a fourth consecutive q/q rise, backed by strong
exports to Asia, continued consumer spending gains and a recovery in
capital spending.

The Cabinet Office will release revisions to GDP data on June 10.

The combined capital investment by Japanese non-financial companies
fell 11.5% in the first quarter of 2010 from a year earlier, the 12th
straight quarterly decline, but the pace of decline slowed from the
17.3% drop in the final quarter of 2009, a government survey showed on
Thursday.

The quarterly survey by the Ministry of Finance also showed that
capex excluding spending on software fell 12.9% from a year before in
Q1, with the pace of decline decelerating from -18.5% in Q4.

On a seasonally adjusted, quarter-over-quarter basis, capex
excluding spending on software slumped 2.6% in January-March after an
upwardly revised 0.3% rise in October-December (previously -0.9%).

The Cabinet Office uses this key piece of data that shows the
demand side of business spending in order to calculate revisions to
first preliminary GDP, which is based only on supply side capex.

“Based the MOF survey and other demand-side data, the real
first-quarter growth in capex is estimated to be revised down to +0.1%
on quarter from the initial reading of +1.0%,” said Akiyoshi Takumori,
chief economist at Sumitomo Mitsui Asset Management.

“It could also turn negative because more seasonal adjustments are
made to GDP data in every release,” he said.

In Q1, business investment in equipment posted the second straight
quarter-on-quarter rise, led by industrial and precision machinery
(bulldozers, camera lenses), growing 1.0% q/q after +1.3% in Q4 of 2009,
which was the first q/q gain in seven quarters.

“The MOF survey also showed a decline in inventories in the first
quarter, pulled down by a sharp drop in works-in-progress inventories,”
Takumori said.

“This will lower GDP growth but at this early stage of an economic
recovery, it is positive to see lower inventories. As the recovery
continues, we will then see a buildup in inventories as firms anticipate
higher sales.”

Judging from the MOF survey and weak data for small businesses,
Takumori expects the Q1 real GDP growth to be revised down to an
annualized +4.0%, or even below, from a preliminary +4.9%.

Mizuho Securities senior economist Naoki Iizuka also predicted that
GDP will be revised down sharply to around 3.5% annualized as he
forecast a revision to capex to a quarter-on-quarter decline, instead of
a rise as reported earlier.

“For the second half of fiscal 2009 that ended in March, capex was
at the stage where it stopped falling. Given the remarkable improvement
in machinery orders as well as sales and profits, companies are expected
to resume capex in April-June,” he said.

“The slump in capex seen in the MOF survey does not mean we have to
change the scenario of a continued economic recovery,” he added.

Japan’s core private-sector machinery orders rose a seasonally
adjusted 5.4% in March from the previous month, posting the first m/m
rise in three months after a revised 3.8% drop in February.

From a year earlier, core private machinery orders rose 1.2% in
March after -7.1% in February, posting the first y/y gain in 21 months.
They have recovered from the record 39.5% plunge marked in January 2009.

Core private-sector machinery orders, which exclude volatile demand
from electric utilities and for ships, are viewed as a leading indicator
of corporate capital spending.

Iizuka noted that corporate sales have recovered to 90% of a recent
peak and that their current profits to 70%, contributing to the first
increase in both sales and profits overall in two years and nine months.

The MOF survey showed that the combined current profits before
extraordinary items of non-financial firms at the parent level surged
163.8% from a year earlier, posting the second straight y/y rise and
improving from the 102.2% rise in the fourth quarter of 2009.

“Drastic cost cuts in the past have led to an improvement in
macro-economic conditions in Japan, which is now supporting corporate
profits,” said Iizuka.

“This year we will see a well balanced macro-economic climate due
to an expected spillover of benefits from normalized business spending
to the household sector. Next year a further economic recovery will push
up costs for the business sector, tipping the macro-economic balance.”

msato@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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