Fx N' Gold

Capital spending in Japan continued to decline in the fourth quarter of last year despite exports advanced alongside recovering global demand. Japanese companies still cutting costs and delaying expansions especially with the weak business environment and deflation risks that continued to weigh on economic activity.

Capital spending in declined 17.3% in the fourth quarter of 2009 following a decline by 24.8%, while it was anticipated to decline 18.4%. Capital spending excluding software slipped 18.5% in 4Q after falling 25.7% in the third quarter.

Today's report showed that companies' sales fell 3.1% in the quarter ended December, which is better than the previous drop by 15.7% in the three months through September. Domestic demand remains weak reflecting households are delaying purchases especially with the declining prices, and that is explaining the prolonged drop in retail trade.

Moreover, companies' profits rose 102.2% during the fourth quarter compared with a decline by 32.4% in the previous quarter, which encouraged companies to start hiring more workers. Japanese manufacturers raised their profit forecasts for 2010 as he global economy is recovering, while they started to add more workers since the second half of 2009, worth mentioning that the jobless rate declined to 4.9% in January the lowest since March 2009 from 5.1%.

Despite the Japanese manufacturing sector is rebounding, third of factory capacity is sitting idle forcing companies not to buy machines or tools needed to enhance productivity, which makes capital spending relatively weak.

The surging yen is corroding corporate earnings to add more pressures on businesses to cut spending, besides affecting the nation's exports negatively as it makes Japanese products lose a competitive advantage.

On the other hand, falling prices are eroding profit margins, keeping in mind that consumer prices excluding food and energy fell 1.2% in January meeting the same reading in December, to signal deflation risks still hindering the economy from realizing full recovery.

Japan's gross domestic product grew an annual 4.6% in the fourth quarter of last year as exports advanced especially with the increasing demand from China, Japan's main trade partner. The economy expanded 1.1% in the quarter ended December from the previous three months.

Overseas shipments gained 5% in the fourth quarter from the previous three months, and net exports added 0.5 percentage points to the GDP, and if the upswing in exports last, we might see manufacturers changing plans and increasing capital spending