June 1, 2020 / 12:01 AM / a month ago

Rise in Japan's first-quarter capex undercut by pandemic-driven profit slump

TOKYO (Reuters) - Japanese firms raised spending on plant and equipment in the first quarter, though a sharp drop in profits highlighted the economic pain inflicted by the coronavirus pandemic.

FILE PHOTO - A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration

Capital spending rose 4.3% in the first quarter year-on-year, lifted by demand for electrical machinery and big-ticket items, a preliminary survey by the Ministry of Finance (MOF) showed on Monday.

However, corporate recurring profits decreased sharply at their fastest pace in over a decade, according to the survey, backing recent data underlining the pandemic’s sweeping impact.

The damage from the virus is likely to have worsened due to a wider hit to the domestic economy from March, said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

“It’s likely there will be a bigger drop in April-June,” he said.

Japan’s economy slipped into recession for the first time in 4-1/2 years in the last quarter, putting the nation on course for its deepest postwar slump.

The government last week lifted an April-imposed state of emergency and approved a second $1.1 trillion stimulus package to combat the blow from the pandemic, which has ravaged the global economy and upended supply chains.

Japan’s factory activity shrank at the fastest pace in over a decade in May, a separate private sector survey showed on Monday.

The finance ministry’s data will be used to calculate revised gross domestic product figures due June 8. The initial estimate showed an annualised 3.4% economic contraction in January-March - analysts expect a less steeper contraction in revised GDP.

The latest MOF survey drew fewer respondents than usual, as the pandemic forced many businesses to close, the ministry said, adding it will be revising the data later by extending the May 10 deadline for respondents by two months.

Takumi expects capital spending to be downgraded as firms that delayed their responses likely included those most affected by the outbreak.

Capital expenditure gained a seasonally adjusted 6.7% quarter-on-quarter in January-March, the survey showed.

Manufacturers’ business spending rose 0.6% from a year earlier, according to the survey, conducted among firms with capital ranging from 10 million yen ($92,876) to 1 billion yen or more. It followed a 9.0% drop in the previous quarter.

Corporate recurring profit tumbled 32.0% in the January-March quarter year-on-year, the biggest drop since July-September 2009, due to declining demand for cars and other transportation goods.

Sales fell for the third straight quarter, down 3.5 on-year and followed the fourth quarter’s 6.4% decline.

($1 = 107.6700 yen)

Reporting by Daniel Leussink; Writing by Tetsushi Kajimoto; Editing by Sam Holmes & Shri Navaratnam

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