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Can Capital Investment Maintain Robust Growth?

Byline: Nobuo Iizuka

Various Data Measuring Capital Investment

With concerns growing about the global economy and challenges such as the United States-China trade war, the key to maintaining positive economic growth for the Japanese economy is private domestic demand. Preliminary GDP data (secondary report) released on Sept. 9, 2019 for the April-June 2019 period showed exports pushing down growth for two consecutive quarters, but with the support of domestic demand it remained positive for three consecutive quarters. On the other hand, there are concerns that personal consumption will become suppressed once the consumption tax rate is raised to 10% in October, and whether capital investment by private business enterprises can maintain its robust growth is being closely monitored.

There are largely three types of data that measure trends in capital investment by private enterprises:

(1) Data that capture movements in goods (investment goods) used for capital investment

(2) Data that survey the amount of capital investment conducted by enterprises

(3) Data that survey the capital investment plans of enterprises

Representative data for the first data sets are data related to Industrial Production released by the Ministry of Economy, Trade and Industry, and Machinery Orders data by the Cabinet Office. For Industrial Production data, Industrial Domestic Shipments of investment goods receives particular attention. It is the sum of production amounts used for domestic investment, out of production amounts as assessed by Industrial Production, and import amounts used for domestic investment. In other words, it looks at the total amount of investment goods as used in domestic capital investment. On the other hand, Machinery Orders are surveyed through interviews with machinery manufacturing enterprises on trends in orders for machinery used in capital investment, and are useful when considering the immediate future outlook for domestic shipments.

Representative data for the second data sets are Financial Statements Statistics of Corporations by the Ministry of Finance. "Financial Statements Statistics of Corporations by Industry, Quarterly", which is released every quarter, surveys sales, profits and capital investments for business enterprises with capital over 10 million yen. Like the first set of data, it measures the current status of capital investment, but it is only released every quarter and the time it takes for its release makes it not useful.

Representative data for the third set of data are the Capital Spending Plan in the Bank of Japan's "Tankan" survey. All together six surveys are conducted from March, immediately before the target fiscal year begins, then on to June, September, December, then forecasts for March the following year which is the month that the fiscal year ends, and actual results for June also for the following year.

Maintaining Positive Growth for April-June Period

According to the "Financial Statements Statistics of Corporations by Industry, Quarterly" which was released on Sept. 2, capital investments for all industries maintained an increasing trend which began from the October-December 2016 period at a growth rate of 1.9% year-on-year (Chart 1). The manufacturing industry which tends to be impacted by exports turned negative at a decrease of 6.9%, but the non-manufacturing industry grew by 7% contributing to maintaining positive growth for all industries. However, when software investments are excluded, all manufacturing industries show negative growth at a decrease of 1.7%, and the non-manufacturing industry saw a mere 1.8% increase. Software investments, such as for improving business efficiency and cash register repairs ahead of the consumption tax rate hike, are actively conducted in the non-manufacturing sector which suffers from a workforce shortage, and supports the entire capital investment.

On the other hand, actual figures for Aggregate Supply of Investment Goods for July were released on Sept. 6 and showed a slight increase of 0.6% compared to the April-June period (Chart 2). Aggregate Supply of Investment Goods saw a sharp increase in the October-December 2018 period, followed by a sharp decline for the January-March 2019 period, but on average it has remained in the flat range since 2018. This movement is mainly affected by capital goods such as machinery used in capital investment.

Let us confirm the outlook for machinery in Machinery Orders. The amount of orders for private sectors excluding volatile orders which are closely watched was declining since the July-September 2018 period, but quickly recovered in the April-June 2019 period. July results which were released on Sept. 12 showed a decrease of 1.0 % compared to the April-June period. However, they still showed an increase of 6.4% compared to the January-March period. Capital investment for the April-June period and until July seemed to maintain moderate growth.

Plans for fiscal 2019?

Will this movement, then, be sustained on to the latter half of fiscal 2019? The March survey and June survey for Fiscal 2019 Capital Investment Plans (year-on-year growth) for Software, RandD, and Fixed Investment excluding Land Purchasing Expenses showed trends around the same as fiscal 2017 (Chart 3). While it does not compare to the sharp rise in Capital Investment growth as was seen in fiscal 2018, it does show a robust plan. According to the September Survey for Fiscal 2019 which was released on Oct. 1, Capital Investment Plans showed 5.3% year-on-year growth, slightly down from the June survey.

Note: This article is written based on the information that was available as of Oct. 1, 2019.

Nobuo Iizuka is a professor of the Department of Economics at Kanagawa University and adviser of the Policy Data Lab at the Tokyo Foundation for Policy Research. He worked for the Nihon Keizai Shimbun (Nikkei) and the Japan Center for Economic Research for more than 20 years, and is one of the most highly-regarded commentators on Japanese business and the economy.
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Author:Nobuo Iizuka
Publication:Japan Economic Foundation (Tokyo, Japan)
Date:Dec 31, 2019
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