Japan's business spending suggests upward revision to first-quarter GDP

TOKYO (Reuters) - Japanese business spending rose in January-March, continuing the expansion seen over the past two years and pointing to a likely upward revision in overall economic growth in the first quarter as investment held up despite external trade pressures.

Ministry of Finance (MOF) data out on Monday showed capital expenditure grew 6.1% in January-March from the same period last year, led by chemicals, production machinery and leasing of goods. It followed a 5.7% gain in the previous quarter.

Excluding software, capital expenditure rose 1.1% in January-March from the previous quarter on a seasonally-adjusted basis, up for a second straight quarter but slowing from the previous quarter’s 3.9% gain.

Many economists said the data, which will be used to calculate revised gross domestic product figures due on June 10, suggested upward revisions to both capital spending and overall GDP growth in the first-quarter.

“It turned out that a recovery in capital expenditure was continuing even as exports have weakened,” said Ryutaro Kono, chief economist at BNP Paribas, who saw an upward revision to annualized GDP growth at 2.4%.

Initial estimates released last month showed Japan’s economy grew an annualized 2.1% in the first quarter as imports fell faster than exports, while business and household spending slipped in a sign of weak domestic demand.

An upward revision to GDP figures could help hose down expectations that Prime Minister Shinzo Abe may postpone an already twice-delayed sales tax hike scheduled for October. The premier has repeatedly vowed the hike will proceed, barring a big economic shock.

“High GDP growth in the first quarter was caused by a big drop in imports, stemming from sluggish domestic demand, which in itself is not something to cheer,” said Takeshi Minami, chief economist at Norinchukin Research Institute, who forecasts an upward revision to 2.7 percent GDP annualized growth.

Capital expenditure has been a bright spot in the world’s third-largest economy, as companies refurbish old equipment and boost investment in automation and labor-saving technology to cope with labor shortages in an ageing society.

However, business investment has recently shown some signs of slowdown as the intensifying Sino-U.S. trade war and softening external demand hit global trade and supply chains, hurting Japan’s export-reliant economy.

Economists expect Japan’s growth to slow in the current quarter reflecting weak demand both at home and abroad.

Monday’s data also showed corporate recurring profits rose 10.3% in January-March from a year earlier, reversing from the previous quarter’s 7.0% decline.

Corporate sales rose 3.0% year-on-year in January-March, up for a 10th straight quarter.

A revised manufacturing survey on Monday showed Japanese factory activity swung back into contraction in May as export orders fell the most in four months.