As the IT boom in world markets continues to feed demand for semiconductors and electronic components...
However, fund managers believe that an upturn in domestic capital expenditure should soon overtake export growth, possibly laying the foundations for a sustainable economic expansion.
Yasushi Okada, analyst at Credit Suisse First Boston, said: "We are seeing brighter signs in capex. Increased corporate cash flows tend to lead corporate capex by approximately two quarters. According to the corporate survey for the fourth quarter, corporate cash flows are rising for the second consecutive year of double-digit improvements in corporate profitability; the pool of funding available for capex is steadily accumulating.
"Machinery orders, a leading indicator for private-sector capex, has risen on the year for four consecutive months since October."
However, Okada says, the growth in corporate profitability in a zero growth environment has been underpinned by a decline in wages. "In the household survey, consumption expenditures for all households fell for six consecutive months following August 1999 as a result of falling winter bonuses for wage earners and a deteriorating employment environment. Given the continued string of major bankruptcies, sector re-alignments and corporate restructuring, conditions are unlikely to change for some time.
"Falling wages and employment are curtailing personal consumption while poor final demand is preventing corporations from passing along higher costs, such as rising crude oil prices.
"However, the effect of declining employment costs has exceeded these negative influences, boosting corporate profits. Given the increase in domestic capex, particularly in IT-related areas, capex should overtake external demand as the driver of the economic recovery in the not-too-distant future."
Ian Harwood, strategist at Dresdner Kleinwort Benson, said: "The industrial production trend in Japan continues to improve, and company profits are accelerating powerfully.
"As in Germany, company profits are highly cyclical and are currently rising very strongly as a result not just of higher output but, crucially, of fast-improving margins. Unit labour costs in manufacturing were down by almost 6% year-on-year in Q4 1999. We expect Q4 company profits to show a continued pick-up from the 10% and 20% year-on-year gains seen in Q2 and Q3 respectively. ment this year."
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