Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Orders from abroad (not part of the headline core
figure) were down 17.8% in November, but this
reflects negative payback for the 16.0% gain posted
in October. When averaged out, the level for
overseas orders in October-November is 9.1% higher
than in Q3. While the large-lot orders posted in
October make it hard to say with confidence that
overseas demand is accelerating again, Asian
demand for capital goods is likely to pick up given the
recovery in global manufacturing. On this score, the
latest data for machine tool orders show Asian
demand, led by China, on the rise again.
Domestic capital stock weakly recovering
Meanwhile, recently released figures for capital stock
show capital accumulation is still recovering only
weakly. According to the Cabinet Office’s preliminary
estimates, real gross capital investment rose 11.0%
y/y in Q3 2010. But while this confirms that spending
is on a recovery track, the level is still only 85% of
the peak set in Q1 2008. The ratio of cumulative
gross capital investment over the past year to the
existing capital stock a year ago is 6.0%. This is on a
par with the level in 2002, which represented the
bottom of the previous capital investment cycle. With
4.4% of existing capital having been scrapped over
the past year, capital stock expanded at the modest
rate of 1.5% y/y.
Growth expectations falling
In terms of the capital stock cycle, investment prior to
2005 increased at a rate corresponding to an
expected growth rate of slightly under 2%. However,
the current rate of spending growth matches growth
expectations of slightly under 1%. The change is
most pronounced for manufacturers, whose
investment in 2005-2006 corresponded to an
expected growth rate of slightly more than 2%. This
climbed to roughly 3% in 2007 but the level now
stands at slightly under 1%.
Non-manufacturers, on the other hand, invested prior
to the Lehman shock at a level corresponding to an
expected growth rate of slightly more than 1%, and
their level now also stands at slightly under 1%. Such
diminishing growth expectations can be attributed to
(1) the collapse of the export boom of 2005-2007 that
was fuelled by credit bubbles overseas and the yen’s
super weak tone; and (2) population decline, whose
adverse impact on domestic demand is becoming
apparent after being concealed by the export boom.
Stabilise growth expectations by joining the TPP
Even if the recovery in the capital stock cycle picks
up somewhat, it is hard to imagine domestic
Chart 3: Capital Stock Cycle – All Industries
(CY, from 1981)
(Capital Investment, % y/y)
20%
1990
15% 2010
2005
10%
5%
0%
-5%
1981
-10%
-15%
-20%
-25% 2009
0
1 2 3
-30%
5% 6% 7% 8% 9% 10% 11% 12%
(Capital Investment in previous year/Capital Stock at end of previous year)
Source: METI, BNP Paribas. Note: CY2010 is 2010 Q3 data.
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Chart 4: Corporate Growth Expectations
(real growth rate, %)
0.0
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Cabinet Office, BNP Paribas
3- Year Ahead
5- Year Ahead
investment robustly increasing so long as the effects
of the ageing population persist. Because population
decline inevitably means reduced prospects for
future sales, companies will naturally curb domestic
business spending. If the authorities try to remedy
this with discretionary policies designed to stimulate
more investment, there is a risk that the result could
be a glut of unprofitable capital stock that weighs on
the nation’s potential to grow.
What is needed, therefore, are new growth areas that
can bolster the return on capital. To this end, we
believe the authorities should consider aggressively
tapping into overseas demand by participating in the
Trans-Pacific Partnership. The free flow of money,
goods and labour across state boundaries would
inevitably bolster growth expectations, thereby
making it possible to arrest the effects of an “ageing
economy” and realise economic rejuvenation (see
Japan: PM Sets Out Two Key Challenges in Market
Mover, 13 January 2011).
Ryutaro Kono/ Hiroshi Shiraishi 20 January 2011
Market Mover
30
www.GlobalMarkets.bnpparibas.com