December 1, 2014 / 12:57 AM / 3 years ago

Japan's third-quarter recession seen milder than feared as capex grows

TOKYO (Reuters) - Japan’s fall into recession between July-September could turn out to be less severe than feared, with new capital expenditure figures out on Monday suggesting revisions will put the third quarter in a slightly more positive light.

Japan's national flag is seen behind a traffic signal of a red man at the Bank of Japan headquarters in Tokyo November 19, 2014. REUTERS/Yuya Shino

The 5.5 percent year-on-year rise in capital expenditure over the third quarter reported on Monday followed a 3.0 percent annual increase in April-June, which could ease concerns about recovery from a sales tax increase earlier this year.

“The revised data will show a smaller contraction in GDP that could be close to zero,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.

“Other data on consumer spending, factory output and business investment show these three factors will drive future growth.”

Japan’s economy still contracted in the third quarter, following a decline in the second quarter and confirming a recession. But rising business investment means the contraction was not as severe as initially estimated.

Compared with the previous quarter, capital spending excluding software rose a seasonally adjusted 3.1 percent, versus a 1.5 percent decline in April-June in an encouraging sign of vigorous business investment.

Preliminary data showed the economy contracted an annualized 1.6 percent in July-September, confirming Japan had entered its third recession in the past four years as a sales tax hike in April hurt consumer spending and business investment.

Revised gross domestic product data is due on Dec. 8. The finance ministry data released on Monday is used to re-calculate the capital expenditure component of GDP.

In preliminary GDP data, capital expenditure shrank 0.2 percent, but this could be revised up to show a 1 percent gain, according to Hidenobu Tokuda, senior economist at Mizuho Research Institute.

The recession set the stage for Prime Minister Shinzo Abe to delay a second sales tax hike that was originally scheduled for next year.

Pushing back the tax hike has eased concerns about consumer spending, but the recession has also shown that Abe’s policies have not been enough to strengthen the underlying economy - even after some two years in office.

Economists expect Japan to resume growth in the current quarter as consumer spending, and Monday’s strong capital expenditure, show that growth will become more broad-based.

Editing by Eric Meijer

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