| OSAKA, Japan, July 8
OSAKA, Japan, July 8 Japanese manufacturers,
flush with cash but loath to spend it at home since the global
financial crisis, are finally shedding their deflationary
mindset and splashing out on the new plant and equipment crucial
to sustaining a nascent economic recovery.
Creating a "virtuous cycle" of expansion that boosts wages
and in turn lifts consumer spending is central to Prime Minister
Shinzo Abe's strategy to unshackle the Japanese economy after
two decades of stagnation.
A year-and-a-half after the launch of "Abenomics" - a mix of
fiscal and monetary stimulus and structural reforms - economic
data, which tends to lag actual spending, has in recent months
begun to show a broad-based pick-up in capital expenditure.
Anecdotal evidence from smaller firms in the industrial
heartland suggests the upturn is continuing to spread beyond the
prosperous automotive sector that led the pack, as companies
gain confidence in the economy and vie to develop and deploy
cutting-edge technologies at their domestic factories.
"Until now, we just couldn't take the plunge," said Takashi
Nanki, director and general manager at Shima Seiki Mfg Ltd
, whose knitting machines make sweaters and knitwear for
the likes of Gucci, Prada and Benetton.
The company, located south of Osaka, is doubling its
domestic capital expenditure for the financial year to March to
2.7 billion yen ($26.6 million), while boosting production
capacity by 10 percent.
Shima Seiki, which barely eked out an operating profit in
the latest financial year after a 500 million yen loss the year
before, was encouraged by the brighter outlook for its export
business, Nanki said, as Abe's reflationary policies reversed
years of yen strength.
Capital spending in Japan has been anaemic for years, a
result of deep-rooted pessimism that deflation - which
encourages firms to put off expenditure for as long as possible
- would persist and the economy would remain in the doldrums.
As a result, corporate Japan sits on a cash pile of some 232
trillion yen ($2.27 trillion), according to Bank of Japan data.
"Japanese firms have long been sitting on ample cash
reserves but they were cautious about boosting investment due to
uncertainty over the economic outlook," said Taro Saito,
director of economic research at NLI Research Institute.
"Companies have grown confident about the outlook since last
year as the economy showed clearer signs of recovery."
Japanese manufacturers boosted overall domestic capital
spending 6.8 percent in the first three months of this year,
finance ministry data shows, the first rise of more than 1
percent in nearly two years and joining a pick-up since early
last year in the service sector.
The automotive sector took an early lead, with double-digit
spending increases in three of the four quarters through March,
but other mainstay sectors such as electronics and office and
industrial equipment have only just started to pick up.
The Bank of Japan's tankan survey released last week showed
that large firms plan to raise capital expenditure 7.4 percent
in the fiscal year to March 2015, more than initially expected.
Machinery orders data, a volatile leading indicator for
capital spending six to nine months ahead, is expected to have
risen modestly in May data due for release on Thursday after
sliding in April.
Part of that rebound can be explained by years of restraint
that left Japanese manufacturers with ageing facilities.
But the economic recovery is also finally taking up much of
the slack left in the wake of the global financial crisis.
Government estimates now indicate that the output gap, which
measures spare capacity in the economy, shrank in the first
quarter to its narrowest since 2008.
"The narrowing output gap could mean that companies need to
either refurbish production facilities or make fresh
investments, which is supportive of capital spending," Saito
Investment in new technology is particularly useful in
creating Abe's virtuous cycle, because it has more
growth-spurring potential than the one-hit boost that comes from
spending that simply replaces existing capacity like-for-like.
There are signs that is starting to happen, with the auto
sector again in the driving seat.
Aisin Seiki Co, a supplier to the Toyota Motor Corp
group and the world's biggest maker of automatic
transmissions, is boosting its domestic capital spending by 11
percent this year to 113.5 billion yen.
Some of that will go towards a 10 billion yen plant to be
completed next April that will make next-generation automatic
transmissions, as the industry competes to boost fuel
efficiency. The plant will develop technology that the group
hopes to introduce across its global production network.
"The Okazaki East plant will be our foothold for taking this
overseas," Aisin Executive Vice President Makoto Mitsuya said at
the company's latest earnings briefing in April.
Denso Corp, the world's second-largest auto parts
maker, is also raising domestic capital expenditure to its
highest since the financial crisis after focusing on operations
abroad, in part to bolster output in Japan of fuel-injection
parts for diesel engines.
Back in the Osaka area, the heart of Japan's struggling
electronics sector, Sumitomo Electric Industries Ltd is
boosting capital spending by 5 percent to 74.9 billion in the
year to next March, its first increase in three years.
A major project is to increase output capacity for undersea
power cables, a high-tech business where it anticipates rising
demand from offshore windfarms. The company has received a piece
of a 400 million euro ($540 million) order from Italy's Terna
SpA for a high-voltage cable linking Italy with hydropower
output in Montenegro.
But economists warn that, without a corresponding pick-up in
domestic consumption or exports, the improvement in capital
spending is unlikely to be sustained.
Across town, cash-strapped display maker Sharp Corp
is not anticipating the kind of big-ticket, multibillion dollar
spending on new factories that used to power Japan's once-mighty
"If you're talking about large-scale investments around 300
to 400 billion yen, we definitely won't do it," Sharp President
Kozo Takahashi told a roundtable for reporters last week.
($1 = 102.1000 Japanese Yen)
(Additional reporting by Tetsushi Kajimoto and Reiji Murai in
Tokyo; Editing by Edmund Klamann and Alex Richardson)