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Ouch. Economic data coming out of Japan are painting a bleaker picture of the world’s second largest economy. Wages continue to shrink. Shoppers and companies are tightening the purse strings. Figures published on Monday show that for the first time in more than four years, capital expenditure shrank in the second quarter, down 4.9 per cent on a year-on-year basis. The data mean a downward revision to second quarter growth is likely and could well turn it negative.

Extenuating circumstances explain some of the weakness. July, when retail sales racked up their biggest drop in two years, was marked by bucket-loads of rain and one less Saturday than the base month. Monday’s Ministry of Finance corporate survey, which revealed the plunge in capital expenditure, may portray a statistical bias. Even if that only offers a partial explanation, there is comfort in the fact that the companies cutting spending are the smaller ones and those in the service sectors. In the case of real estate, for example, rising input prices and (in many areas) sluggish sales prices act as a natural brake on capex.

Reassuringly, recurring profits continue to rise, up 12 per cent (17 per cent for manufacturers) in the second quarter on a year-on-year basis. That suggests corporate Japan will remain in a position to invest – particularly if it continues to sweep up an increasing share of the spoils to the detriment of workers. Of course, willingness to add more production may falter if, say, global demand subsides or a stronger yen undermines profitability. But the corporate survey does not signal the beginning of the end for Japan’s longest postwar period of economic expansion. What it does do, however, is frustrate the Bank of Japan’s efforts to normalise interest rates swiftly. Weak domestic data, including another month of deflation, and tough conditions in global markets mean the bank is likely to hold fire this month.

Copyright The Financial Times Limited 2017. All rights reserved.
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