Still, business investment continues to hold up even while declining, and the rate of decline in the first quarter was less than half the rate seen during the Japan's three most recent recessions. While capital spending fell for a fourth consecutive quarter in the three months ended March, the average rate of decrease in each quarter was less than 5 percent, compared with more than 10 percent in the three downturns since 1990.
The flipside of this, evidently, is that exports have continued to perform better than expected in the face of the US downturn and are even doing so now when confronted by an additional slowdown in Europe. The reason for this is relatively straightforward: continuing demand driven by vigorous growth in some emerging economies.
In addition, inside Japan itself companies remain under pressure to upgrade equipment after postponing purchases, in some cases for many years. More than half of Japanese businesses said the main reason for capital investment during the last fiscal year was to replace equipment, according to a government survey released in March.
Q1 2008 GDP Revision
At the same time Japan's first-quarter economic growth was faster than initially estimated according to figures released today which show that businesses spent more on capital equipment than previously estimated, while government spending fell rather less than initially estimated. Japan's gross domestic product expanded year on year by 4 percent in the three months which ended March 31, up from the 3.3 percent estimated last month according to revised data from the Cabinet Office.
Japan expanded 1 percent from the fourth quarter, today's figures showed, more than the 0.8 percent reported last month. Business spending increased 0.2 percent, compared with a 0.9 percent decline initially estimated, reflecting figures published by the Finance Ministry last week that showed companies increased capital spending by 1.3 percent in the quarter, and this data alone accounts for about 60 percent of the business investment component of revised GDP.
The rate of expansion of both exports and imports was also revised down, exports from a quarter on quarter growth of 4.5% to 4% and imports from 2% to 1.4%.
Leading Index
Japan's leading index tends to confirm the recent capex and machinery orders data, and suggests that the Japanese economy may continue to avoid recession during the next three months. The leading index, which is a composite of 12 indiactors including housing starts and stock prices, rose to 92.8 percent in April from a revised 90.8 percent the March, according to the latest release from the Cabinet Office. The increase suggests that far from slowing down growth may even accelerate slightly in the coming quarter.
The index is partly helped by the fact that Japan's housing starts have been recovering after plunging to a four-decade low last year because of a permit logjam which was produced by new government regulations introduced to stop building fraud. The government relaxed the rules in November and housing investment rose for the first time since 2006 in the first quarter of 2008.
Real wages also rose in April for a fourth month, the longest positive sequence in almost two years. Also the hiring of full-time workers has been accelerating since October as companies added permanent staff to comply with new labor regulations. Employers hired full-time staff at twice the pace of part-time workers in April. So basically consumer demand has been more positive of late in Japan, and while we are a far cry from seeing a consumption driven expansion, the year on year increase of 3.3% which was achieved in the first quarter is hardly to be sniffed at.
So Japan may well extend its longest postwar expansion for yet another quarter as a rebound in housing following a bureacratic driven crunch on new starts supports headline growth and rising wages give some relief to ever struggling consumer demand. However, the increase in the leading index doesn'tnecessarily mean conditions will improve substantially since the index has been on a declining trend since it peaked in 2006, and what we have been seeing is to some extent a rebound from the very low levels registered last autumn.
Doubts about sustainability certainly linger however, and Japan's longest postwar expansion may well be coming to an end, as record crude oil and raw material costs discourage companies from hiring and spending another government report showed. The Japanese economy may be reaching a "turning point,'' the Cabinet Office said earlier this week after releasing figures that showed the coincident index, a measure of current economic activity, fell to 101.7 in April from a revised 102.4 in March.
The Japanese government hasn't described the economy in these terms since the recession of 2001. Factory output has been falling and corporate profits are deteriorating, indicating that there may well be an underlying loos of Japan momentum since growth the first quarter. The issue I think very much depends on what happens to growth in those emerging markets where Japan has been sustaining its export expansion, and the future of this growth depends in large part, I think, on what happens to inflation.
To add somewhat to the confusion produced by this plethora of reports it is also worth noting that the Japanese government recently changed the methodology behind the leading, coincident and lagging indexes. All of these are now composite indexes, which means they reflect the magnitude of the ongoing improvement or deterioration in economic indicators, whereas previously they were diffusion indexes whose results depended on whether indicators had improved or worsened from three months earlier. So a certain amount of caution is advised in reaching any strong conclusions here.
In other recent reports we get further evidence of how rising energy and commodity prices may be hurting businesses and consumers. Bank lending rose at the fastest pace in 16 months in May as companies borrowed more to pay for costlier raw materials, according to the Bank of Japan.
Economy Watchers Index
In addition Japan's economy watchers' index, which measures workers' perception of economic trends, fell for the second straight month in May as the cost of living increased with the rise in petrol prices. The major index for current conditions fell to 32.1 last month from 35.5 in April, the Cabinet Office said. The index hit 31.8 in January, the lowest since December 2001.
The data showed that workers' perception of Japan's economic recovery has been 'extremely weak,' the Cabinet Office said. The index measures whether respondents with jobs most sensitive to economic conditions, such as taxi and truck drivers, department stores sales staff, as well as restaurant and shop owners, believe economic conditions are better or worse than they were three months before.
A reading above 50 indicates that most respondents believe conditions are improving while a reading below 50 suggests that most respondents think conditions are worsening.
The forward-looking index, which measures expectations about economic conditions in subsequent months, slipped to 35.1 in May, the lowest since December 2001 when the index hit 33.2. The index stood at 36.1 in April.
Consumer Confidence
Japan's consumer confidence also fell in May to the second-lowest level on record. The index dropped to 33.9 from 35.2 in April according to the Cabinet Office. May's reading was the lowest since December 2001, when the index touched a record low of 33.0.
