Japan Inc. Is Doing Better Than People Realize

(Bloomberg Opinion) -- Investors should get used to more big surprises from Japan.

The country’s economy grew an annualized 2.1% in the first quarter, defying economists’ expectations for a contraction. The government wasn’t expecting good news: Earlier this month, it moved its provisional assessment of the economy to “worsening” from “weakening” for the first time in six years after an index of economic conditions fell between February and March.

Obscured in what seems like perpetually downbeat (albeit not strikingly bad) data on wages, consumer confidence and consumption is how well manufacturing and machinery businesses are doing. Their spending is supporting the economy.  

Over the past fiscal year, Japanese companies’ planned capital expenditure levels rose to their highest levels in years, according to the Bank of Japan’s Tankan survey. Capital expenditure levels as a portion of sales, a leading indicator for actual spending, has also been ticking up at machinery companies such as Nidec Corp. More broadly, corporate activity and sentiment among manufacturers have been well above levels in recessionary periods.

Robot export volumes and prices are beginning to recover after being hurt over the past year by demand in China and Apple Inc.’s travails with the iPhone. Headline numbers suggest machine-tool orders are tanking, with a drop of almost 30% overall in March, but parsing the data shows cause for optimism. Orders from places such as Vietnam, Eastern Europe and the U.K are rising even as the U.S. and China show declines from a year earlier. 

Meanwhile, demand for industrial machinery (as opposed to precision machinery used in electronics) has held up. Satellite imagery suggests that production activity is humming along. Slowing orders from China, meanwhile, may be helping to even out imbalances in the supply chain that had caused bottlenecks. Diminishing reliance on China is probably a healthy trend given the country’s shift toward domestic machinery makers. 

With President Donald Trump’s trade war looking more like bluster than a sustained hit to global demand, Japan’s conservative manufacturers could feel compelled to start spending more and maintaining, if not boosting, activity and exports. Recent reports suggest the U.S. and Japan may accelerate efforts to reach a trade deal as Washington’s conflict with China intensifies.

Keep an eye on Japan Inc. to get a ground’s-eye view of where the economy is really heading.

Net exports was a big contributor to the uptick in first-quarter GDP.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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