By Max Sato

TOKYO (MNI) – Japan’s economic growth in the second quarter of 2010
is expected to be revised up sharply next week from an initial estimate
of a below-potential 0.4% annualized growth to around +1.6% after a
government survey showed a stark improvement in business investment,
economists said on Friday.

And backed by robust consumer spending on air conditioners amid
record heat waves in Japan and on vehicles before the expiry of
subsidies for low-emission cars and trucks, the economic growth should
continue in the July-September quarter, they said.

But they also warned that as the effects of economic stimulus
measures wane, GDP may show weak figures in the final quarter of 2010.

Preliminary data released last month showed that gross domestic
product expanded a real 0.1% in April-June from the previous quarter (an
annualized 0.4%), a third consecutive q/q rise, backed by strong exports
to Europe and a solid recovery in business investment, while consumer
spending slumped on fading effects of fiscal stimulus.

The Cabinet Office will release revisions to GDP data on Sept. 10.

The combined capital investment by Japanese non-financial companies
fell 1.7% in the second quarter of 2010 from a year earlier, the 13th
straight quarterly decline, but the pace of decline sharply decelerated
from the 11.5% drop in the first quarter, a government survey showed on
Friday.

The quarterly survey by the Ministry of Finance also showed that
business investment in factories and offices excluding spending on
software fell 1.5% from a year before in Q2, with the pace of decline
decelerating from -12.9% in Q1.

On a seasonally adjusted, quarter-over-quarter basis, capex
excluding spending on software rose 6.4% in April-June after an upwardly
revised 1.0% fall in January-March (previously -2.6%).

The Cabinet Office uses this key piece of data that shows the
demand side of business spending in order to calculate revisions to
first preliminary GDP, which is based only on supply side capex.

The MOF shuffles small business samples for the April-June quarter
every year, which needs to be adjusted when projecting capex
contribution to the overall GDP growth.

“Considering the sample change and making a rough adjustment to the
capex figures in order to narrow the gap between the MOF survey and the
GDP data, the quarter-on-quarter rise of 6.4% should be discounted to
+4.4%,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset
Management.

“But that’s still about 2 percentage points higher than the
temporary estimate of +1.9% in the demand side capex that was assumed by
the Cabinet Office.”

In preliminary Q2 data, business investment in equipment showed the
third straight quarter-on-quarter rise, led by demand for industrial
machinery. It grew 0.5% q/q in Q2 after a revised +0.6% in Q1 and +1.5%
in Q4, 2009, which was the first q/q gain in seven quarters.

Takumori expects the growth in capex to be revised up to +1.2% q/q
from the initial estimate of +0.5%, barring a large change in past
figures that could be triggered by seasonal adjustments made every time
GDP data is released.

He sees the Q2 GDP growth to be revised up sharply to +0.4% q/q, or
an annualized +1.6%, from the preliminary reading of +0.1% q/q (+0.4%
annualized), also because the contribution of private-sector inventories
is forecast to be revised up to +0.1 percentage point from an initial
-0.2 point.

“In July-September spending on automobiles will show strong growth
while we expect to see rush purchases of tobacco in September before the
tax hike in October,” said Takumori. “But in October-December, we will
see a payback for these gains.”

The Q4 GDP will probably show zero growth and it could even post a
contraction if the effects of fiscal stimulus wane fast, he added.

Mizuho Securities senior economist Naoki Iizuka also predicted that
GDP will be revised up sharply to +0.4% q/q, or an annualized +1.6%, as
he forecast a revision to capex to a rise in a range of +0.5% to +1.0%
and a revision to private inventories to a positive 0.1 percentage point
contribution from the negative 0.2 point pullback.

“People monitoring economic data closely including industrial
production minus the distortion from seasonal adjustments caused by the
Lehman shock would have thought there was something wrong with the
preliminary Q2 GDP data,” he said.

“The culprit in the GDP estimate model was inventories. While
production has been moving at a cruising speed after recovering fast, it
was strange to see the distribution and work-in-progress inventories
push down the overall economic growth.”

The revised GDP data will show the economic growth in April-June
was relatively strong, which should continue through July-September, but
the recent stock market sell-off has been caused by the fear that the
economy could mark time or slump in the second half of the current
fiscal year to March 31, 2011, said Iizuka.

July machinery orders due out Wednesday and capex plans found in
the government’s quarterly Business Outlook Survey for July-September
due on Thursday should provide a clue to the macro-economic forecast for
the coming months, he said.

“With production recovering fast, some firms saw a capacity
shortage in March and April this years, which results in growth in
machinery orders through April-June and an expected rise in
July-September,” said Iizuka.

“But signs of a slowdown in overseas demand and the rise in the yen
appear to have made companies reconsider their capex plans. They are not
stepping on the brake but they may be lifting their foot off the gas
pedal.”

Japan’s core private-sector machinery orders rebounded a seasonally
adjusted 1.6% in June from the previous month, posting the first rise in
two months after slumping 9.1% in May.

Core orders are forecast by the Cabinet Office to post a fourth
straight quarter-on-quarter increase, up 0.8% in July-September, after
rising 0.3% in April-June and gaining 2.9% in January-March.

The average economist forecast for July core private machinery
orders is +1.8% m/m (forecast range: -3.5% to +9.5%).

Core private-sector machinery orders, which exclude volatile demand
from electric utilities and for ships, are viewed as a leading indicator
of corporate capital spending.

Among the latest data, motor vehicle sales in Japan jumped 46.7%
from a year earlier to 290,789 units in August, posting the 13th
straight month of year-on-year rises, backed by tax breaks for buying
low emission automobiles.

Consumers rushed to car dealerships before the government finishes
providing subsidies for buying energy-efficient vehicles by the end of
September. It will continue applying lower tax rates to buying and
owning low-emission cars and trucks.

Meanwhile, average household spending rose a real 1.1% from a year
earlier to Y285,274 in July, as heat waves boosted sales of
air-conditioners and beverages while some consumers rushed to car
dealerships before the end of government subsidies, data from the
Ministry of Internal Affairs and Communications showed last week.

The government’s reward program for buying greener consumer
electronics has generally supported demand for certain models of
flat-screen TVs, refrigerators and air conditioners/heaters.

But in the preliminary April-June GDP, spending on flat-screen TVs
slowed after rush purchases in March before the government tightened
rules for its reward program, while spending on durable goods remains at
a high level.

msato@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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