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Business investment off 3.9% in quarter amid wariness

Kyodo

Capital spending by companies dropped 3.9 percent in the first quarter from a year earlier as companies remained wary of the economic outlook despite the weaker yen and budding hopes for a recovery in exports, the government said Monday.

Business investment by all nonfinancial sectors for purposes such as building factories and introducing new equipment fell for the second straight quarter in January-March. It totaled ¥11.39 trillion during the three months, the Finance Ministry said.

Growth in domestic demand, along with higher private capital spending, is vital if the Abe administration is going to achieve its goal of overcoming nearly two decades of deflationary recession, analysts said.

Whether the administration can produce effective measures to encourage the corporate sector to spend more money through deregulation and structural reform in its economic growth strategy, to be finalized in mid-June, will be closely watched, they added.

On a quarter-on-quarter basis, capital spending, excluding investment in software, slid a seasonally adjusted 0.9 percent from the October-December period.

The data will affect revisions to Japan’s economic growth figures, with the Cabinet Office set to release revised first-quarter gross domestic product next Monday.

Takeshi Minami, chief economist at Norinchukin Research Institute, said GDP is expected to be downgraded slightly in the second estimate.

Monday’s readings showed spending by manufacturers plummeted 8.3 percent from a year earlier to ¥3.85 trillion, while nonmanufacturers logged a 1.5 percent decrease to ¥7.54 trillion.

Electric equipment and steel makers marked notable falls, as lackluster sales during the first three months of this year and uncertainty over future demand made them reluctant to boost spending, a Finance Ministry official said.

Capital expenditures plunged 8.7 percent on year in the October-December period.

A preliminary GDP report released May 16 showed the economy grew at its fastest pace in a year in January-March, marking an annualized real 3.5 percent rise, indicating that expectations of an economic recovery sparked by Shinzo Abe’s policies have prodded consumers to spend more.

Exports, a key engine of growth, expanded 3.8 percent, posting their first gain in four quarters, with the U.S. economy bouncing back and Abe’s policies, centering on drastic monetary easing by the Bank of Japan and massive public spending, having steeply driven down the value of the yen.

But the GDP data also suggested concerns have been growing that the yen’s sharp slide will push up import costs and that corporate profits could decline due to deterioration in the terms of trade, discouraging firms from beefing up investment.

According to the preliminary GDP report, capital spending, which accounts for around 15 percent of Japan’s GDP, was down 0.7 percent on quarter in the January-March period, marking a fifth consecutive quarterly loss.

Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute, said the outlook for business investment will hinge on whether companies can believe domestic demand will grow.

Abe’s government has to express its commitment in its growth strategy to taking steps such as tax breaks to encourage firms to increase spending and to bump up investment in Japan from abroad, Kumano said.

The ministry surveyed 30,279 companies capitalized at ¥10 million or more, of which 21,998, or 72.7 percent, provided valid responses.

Startup crowd-funding

jiji

The Financial Services Agency is considering allowing unlisted startup firms to secure capital from general investors through the Internet in a method known as crowd-funding, sources said.

The financial regulator is also planning to support startups’ initial public offerings by easing criteria for stock listings, the sources said.

The FSA hopes to include these measures in the government’s growth strategy, to be drawn up this month, they said.

It will prepare a necessary legal framework through discussions at the Financial System Council, which advises the prime minister, in the hope of submitting relevant bills to next year’s regular Diet session.

Through the introduction of the crowd-funding system, the FSA plans to make it easier for investors to buy shares in unlisted companies online, the sources said. Strict rules are placed on trading in unlisted shares.

Putting up capital for unlisted firms could be risky, but investors could also obtain opportunities of reaping profits from these companies’ possible stock listings in the future. To prevent fraud involving unlisted shares, the FSA will act to protect investors and keep rogue traders at bay, the sources said.