By Stanley White
TOKYO (Reuters) – Japanese corporate capital expenditures grew in January-March at the fastest pace in a year, adding to hopes that a recovery in business investment will spur growth in the world’s third-largest economy.
Corporate spending on plant and equipment, along with wage growth, hold the key to the ultimate success of Prime Minister Shinzo Abe’s economic reflationary policy recipe aimed at generating a virtuous cycle of private-sector-led growth.
The 7.3 percent year-on-year increase in capital spending in the first quarter followed a 2.8 percent annual gain in October-December, data by the Ministry of Finance showed on Monday.
The capex data, which will be used for calculating revised gross domestic product (GDP) data due June 8, also showed a decline in inventories of finished goods and partially finished goods.
Lower inventories could offset the positive contribution from higher capital expenditure and lead to little change to a preliminary reading of 2.4 percent annualized growth in the first quarter, analysts say.
However, economists said gains in capital expenditure should be taken as a sign that economic growth will accelerate as domestic demand strengthens.
A separate manufacturing survey also showed the manufacturing sector expanded in May for the first time in two months, suggesting the economy may be grinding higher again after faltering in April.
“Capital expenditure looks particularly strong,” said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
“The drag on the economy caused by the sales tax hike last year has ended. The decline in inventories is also a positive. Policymakers have reason to be optimistic.”
Excluding spending on software, capital expenditure rose a seasonally-adjusted 5.8 percent from the previous quarter, faster than a 0.9 percent increase in October-December.
Inventories fell by an annual 2.6 trillion yen ($20.93 billion), faster than a 600 billion yen annual decline in the previous quarter.
Preliminary GDP data released last month showed the economy grew more than expected in the first quarter, but inventories were the biggest contributor to growth.
Last year companies held back on capital expenditure as an increase in the nationwide sales tax hurt consumer spending.
Monday’s data showed recurring profits at Japanese firms rose 0.4 percent in January-March from a year ago, slower than an 11.6 percent annual increase in the previous quarter.
Rising business investment and gains in manufacturing are also a welcome development for the Bank of Japan, which is counting on a recovery in domestic demand to lift consumer prices to its 2 percent inflation target.
($1 = 124.2100 yen)
(Editing by Kim Coghill)