Japanese Companies Refraining from Equipment Investment

November 29, 2009 – Osaka, Japan

Today Nikkei, Japan’s leading newspaper specialized in economy/business and politics, reported that according to their survey result, total equipment investment* for 2009 is -17.6% from 2008 which is the biggest drop since 1990, and is also -2.7% from the original plan made in the beginning of 2009. Although business environment seems to started to improve and many companies have been making upward revision their financial performance estimation, economy outlook is not bright with drastic high yen etc. Thus in general, Japanese companies are refraining from aggressive investment, especially major manufacturers such as automobile and consumer electronics.

2009 Revised Equipment Investment Plan (In million yen)
(Source: Nikkei, translated by the author)

Industry / No. of Companies / 2009 Revised Plan (vs. 2008) / Vs. the Original Plan / 2008 Performance (Vs. 2007)
Total Industry / 1,598 / 22,668,971 (-17.6) / -2.7 / 27,525,633 (-6.1)
(Excluding Electricity) / 1,589 / 20,137,434 (-19.9) / -2.9 / 25,137,427 (-7.8)
Manufacturers / 810 / 11,715,060 (-26.1) / -3.2 / 15,847,995 (-8.2)

The survey of equipment investment trend (based on revised plan of 1,598 companies) was executed in October. According to the result, the total equipment investment has decreased from previous year for 2 consecutive years; 2008 was -6.1 from 2007 and 2009 was -17.6% from 2008. This is primarily because manufacturers’ drop is as big as -26.1%. Non-manufacturers’ is -6.2% which is comparatively small but it is second to -9.1% in 2002 when IT bubble collapsed.

Looking by industry, among 17 manufacturers, 15 excluding food and pharmaceuticals are minus from 2008, among which 7 industries including automobile, machinery and electronics are decrease in more than 30%. For non-manufacturers, 4 industries including electricity (+6%) and transportation (+10.3) are plus from 2008 but the remaining 12 industries including telecommunications and retailers are minus.

In addition, many companies are further cutting investment from the original plan. For example, Nippon Steel Corporation cut its original plan of investment for production capacity increase by 50 billion yen to 340 billion yen, and Toyota cut by 70 billion yen to 760 billion yen, leading to -3.2% from the original plan for overall manufacturers. Non-manufacturers’ is -2.2% from the original plan, which is minus in 11 years, attributing especially to maritime transportation (-30.7%) and land transportation (-10%).

According to the government, flash report of July-Sep GDP is +4.8% from the previous quarter which is plus for 2 consecutive quarters and equipment investment also increased after 6 quarters. This may well mean that production that had once dropped due to global economic crisis started to recover; however, there are anxieties of another plunge in economy and high yen. When looked by yearly, it is quite possible that companies are really tightening their investment.

If this circumstance should continue, an expert points out that with companies relying more on their revenue from external demand, it cannot be avoided that equipment will be invested overseas.

* Equipment Investment and Economy
(Source: Nikkei, edited and translated by the author)
Equipment investment of companies is an important constituent of GDP, and is a metrics of business climate outlook. Increase in investment means that economy is expanding, and decrease in investment means plunge in economy. In general, GDP growth rate and equipment investment increase-decrease rate are linked in many cases.
Primary objectives of investment include increase in production, renewal of old equipment and countermeasures of safety and environment. Investments such as new factory construction and implementation of large machinery have big positive impact on related industries and leads to economic expansion.