Japan recieves more bad news on economy

December 10, 2008
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, TOKYO, December 10 – Japan received more bad news on the economy Wednesday as a gauge of business investment fell sharply, reflecting cost-cutting measures by companies to survive the financial crisis.

Fears of a return to deflation in Asia\’s largest economy also grew as prices at the factory gate dropped by the most on record, reflecting recent plunges in oil and raw material costs as the global economy worsens.

Japan\’s core machinery orders, a leading indicator of corporate capital spending, dropped 4.4 percent in October from the previous month, and by 15.5 percent from a year earlier.

"Companies\’ appetite for investment is weak, which is likely to continue at least until the end of next year, when corporate profits may begin to recover," said Taro Saito, senior economist at the NLI Research Institute.

Foreign orders from overseas plummeted 37.2 percent, reflecting the grim conditions in many overseas economies.

"Companies have looked to restrict investment in light of the liquidity crunch," said Morgan Stanley economist Takehiro Sato.

"Companies have repeatedly announced freezes or reductions to capital expenditure, particularly in manufacturing," he said.

Japan\’s corporate sector has been a key driver of a recovery in Asia\’s largest economy following the recessions of the 1990s.

But firms are now cutting back their investment in new plant and equipment in response to the financial crisis, raising fears that the current recession will be deeper and longer than previously feared.

Japan\’s economy shrank an annualised 1.8 percent in the third quarter, much worse than initially thought, official figures showed Tuesday.

Wholesale prices in November fell 1.9 percent from the previous month, a third straight drop and the sharpest on record, the central bank said.

"The decline is attributed largely to falls in oil and other commodity prices, reflecting slowing global demand," said a BoJ official.

Japan was stuck in a deflationary spiral for years after its economic bubble burst in the early 1990s, cutting into company profits and encouraging consumers to put off spending to get a better bargain in the future.

Inflation hit a decade high 2.4 percent in July after deflation finally ended following years of zero interest rates. But with energy costs now sinking, many analysts expect a return to falling prices sometime next year.

Core inflation could turn negative for a few months, predicted Junko Nishioka, an economist at RBS Securities.

"However, we do not foresee spiral-like downward pressure on prices as Japan experienced during 1998-2003, since the financial positions of Japanese companies have significantly improved compared to the past," Nishioka said.

Companies from Sony Corp. to Toyota Motor Corp. have been streamlining their operations to cope with weakening demand.

Some analysts believe Japan\’s central bank will be forced to cut its super-low interest rates again to almost zero next year to revive the recession-hit economy.

Financial markets are now focusing on the BoJ\’s quarterly Tankan survey of business confidence due out next Monday.

"As the next Tankan survey is expected to be very bad, the Bank of Japan may need to cut rates immediately if there is a volatile reaction in stock and currency markets," Saito at the NLI Research Institute said.

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