Japan to take off, strength in doubt

By Tatsuo Ito

TOKYO (Reuters): Capital spending by Japanese firms, one of the twin forces pivotal to economic recovery, may take off soon but analysts said the rise may be tempered by Old Japan trepidation over new information technology.

Analysts agree that investment related to information technology (IT), a key driving force in the longest U.S. expansion on record, could also hold the key to reviving stagnant capital spending and improving productivity in laggard Japan.

But many hurdles must be cleared before the Japanese economy, struggling to clamber out of a decade-long recession, is to reap the full benefits of IT innovation, analysts said.

Not only can the IT revolution boost productivity, but it can also have an impact on the overall economy and business practices, including distribution and consumption, they said.

"Capital spending is set to take off in the April-June period, or at the latest in the following quarter, which should surely boost the economy," said Yunosuke Ikeda, economist at Nomura Research Institute.

"A rise in capital spending, however, would be a result of cyclical movements on the back of rising corporate profits, rather than signs that real IT innovation is taking place," Ikeda added.

Ikeda said IT-related investment in equipment by major electronics manufacturers and telecommunications firms currently accounts for 20 percent of all capital investment.

However, a 10 percent increase in IT-related spending by these industries, for instance, would only result in pushing up gross domestic product (GDP) by 0.3 percent, he said.

According to the Bank of Japan quarterly tankan survey in December, big firms planned to cut their capital spending by 10.8 percent in the fiscal year ending in March from the previous year, the weakest figure since 1983.

A Ministry of Trade and Industry forecast for the next fiscal year sees growth in capital spending of 1.8 percent.

Even if capital spending does recover later this year, that won't be enough to lead to a full-fledged recovery if support from exports, coupled with government fiscal injections, starts to falter, Ikeda said.

A revival of capital expenditure, which accounts for about 15 percent of GDP, is essential if the government is to hit its official growth target of 1.0 percent for the next fiscal year starting on April 1.

Economic Planning Agency (EPA) chief Taichi Sakaiya said recently the economy will embark on a full-fledged recovery around September, partly led by fresh capital spending.

Personal consumption, the other main engine of growth and accounting for 60 percent of GDP, remains in the doldrums.

Economists said IT innovation will result in accelerating the process of "creative destruction", prompting a shift in capital from failing technologies into those at the cutting edge.

But in Japan, the ripple effect of IT-related investment to firms not conventionally regarded as high tech has so far been limited, they said.

This is because many companies remain burdened by overcapacity, estimated at about 50 trillion yen -- or 10 percent of GDP -- since the asset price bubble burst in the early 1990s, economists said.

"IT-related investment is not spreading overall into industry," said Ryoko Takahashi, an official of the Bank of Japan's research and statistic bureau, said in a private report.

Non-manufacturers such as construction and retail firms are now still focusing more on downstreaming existing business operations to reduce costs rather than on introducing IT to ensure efficiency, she said.

"About 80 percent of the heads of Japanese companies have no clear vision of what to do with IT and are reluctant to change drastically their organization and business practices," said Toru Nabeyama, director of the economic and industrial research department at Development Bank of Japan, a state-run bank.

"In this situation, IT doesn't work well, even if they regard it as an important tool for their business," he said.