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Japan's Economy Rebounds as Business Spends on Labor-Saving Tech

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Capital investment drove a strong rebound in Japan’s economy in the second quarter, as companies turned to technology to cope with a labor shortage.

Signs that domestic demand is beginning to take over as a source of growth will be welcome at the Bank of Japan, which is struggling to hit its inflation target of 2 percent. It also helps bolster the economy before a hit next year when the Abe government is scheduled to hike the sales tax.

Japan’s extreme labor shortage is fueling business investment, which in turn is driving economic growth, Kathy Matsui, chief Japan equity strategist at Goldman Sachs, told Bloomberg TV.

"It’s really all about capex, and particularly IT capex, which can enhance productivity and overall output over the long run," Matsui said. "We think that is going to remain a core driver of growth."

The highlights of the data released on Friday:

  • Gross domestic product expanded at an annualized rate of 1.9 percent in the three months ended June 30, topping a forecast of 1.4 percent.
  • Business spending jumped 1.3 percent from the first quarter. That was the biggest increase since the fourth quarter of 2016.
  • Private consumption rose 0.7 percent, beating estimates of 0.2 percent.

While consumption improved, it remains a question mark. Wage gains are rising, but they haven’t reached levels that would drive inflation to the BOJ’s target anytime in the foreseeable future. The numbers looked better this quarter, but the overall consumption trend hasn’t changed dramatically, said Toru Suehiro, senior market economist at Mizuho Securities Co.

Other possible headwinds for Japan include any move by the U.S. to impose new tariffs on car imports, an economic slowdown in China and the impact of poor weather in Japan, Matsui said. Japan has been hit by extremes of heat and rain in recent months that have brought fatalities and disruption to business and transport links.

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What Our Economist Says …
"The less vibrant consumer spending is, the more the economy may have to lean on capex for growth. But it’s business spending that could suffer the most from Japan’s biggest external risks — U.S. protectionism, and slowing growth in China."

– Yuki Masujima, senior economist, Bloomberg Economics

For more, see out JAPAN REACT

"The animal spirits of corporations are coming back. We’re seeing a record amount of M&A activity, which does tell you that corporate CEOs are actually engaging," Jesper Koll, chief executive officer of Wisdomtree Japan Inc., said on Bloomberg TV. "Now we’ve got positive business expenditure data. That suggests investing for growth, investing in better technology."

Koll, like Masujima, was also worried by the trade outlook, describing possible U.S. auto tariffs as the "elephant in the room."

"If there were to be 25 percent tariffs on Japanese cars and car parts, that could cut economic growth about about half-a-percent, which would quite enormous," he said.

Net exports, or shipments minus imports, subtracted 0.1 percentage point from GDP growth. A rise in imports of commercial aircraft was one key contributor to the picture here.

Other Details:

  • Measured quarter on quarter, GDP grew 0.5 percent (forecast +0.3 percent).
  • The reading for annualized GDP in the first quarter was revised down to -0.9 percent from -0.6 percent.
  • Nominal GDP rose 0.4 percent in second quarter (forecast +0.2 percent)
  • Private inventories made no contribution to GDP in the quarter.

— With assistance by Isaac Aquino, and Emi Urabe

(Recasts, adds economists’ comments, details.)

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    American CEOs don't see US economic slowdown yet, says head of executive group

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    Global CEOs are seeing a bit of a slowdown outside the United States, but that’s not what U.S. chief executives are saying about the nation’s economy, according to Steve Odland, president and CEO of The Conference Board.

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    The organization, a global, independent business membership and research association, conducts a number of CEO and confidence studies.

    “The U.S. numbers look very strong. All of the Conference Board indicators from the consumer confidence index to the leading economic indicators to the expectations index all say that the next six months expect to be very good,” said Odland, a CNBC contributor who once served as CEO of both Office Depot and AutoZone.

    He told CNBC’s “Power Lunch” on Friday the group’s forecast for 2018 gross domestic product is about 3.1 percent, while 2019’s is 3.2 percent.

    Its leading economic index for September increased 0.5 percent and its consumer confidence index moved up 2.6 points in October. However, its measure of CEO confidence declined in the third quarter, thanks to concerns about rising interest rates.

    Odland’s remarks follow CNBC’s Jim Cramer’s comments that CEOs are telling him how quickly things have cooled in the economy.

    “So many of them are baffled that we could find ourselves in this late-cycle dilemma that wasn’t supposed to occur so soon,” the “Mad Money” host said on Thursday.

    Odland didn’t say that Cramer was wrong. Instead, he pointed out that there are some sectors that may be experiencing a slowdown.

    “Ten years into a recovery, you would expect to see some of the leading sectors, some of the leading companies on that cycle to begin to slow down. And you would expect to see different geographic issues,” he said. “It’s a mixed bag.”

    Bill George, former Medtronic chairman and a CNBC contributor, agrees. For example, the retail sector has never been better, and health-care execs are bullish, he said. However, for the auto sector it is near the end of the business cycle, he added.

    “We are at the end of a very long cycle,” he told “Power Lunch.” “It could continue for several years, but everyone’s concerned about risk.”

    He said the biggest risk is global trade, specifically with China.

    — CNBC’s Elizabeth Gurdus contributed to this report.

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    Canada falling behind in the knowledge economy due to 'outdated thinking': Balsillie

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    Canadian governments need to radically rethink their approach to the knowledge economy if the country is to be anything more than a branch plant for global technology giants, former BlackBerry Ltd. co-CEO Jim Balsillie told a breakfast gathering in Toronto Friday.

    “I think they confuse a cheap jobs strategy … (and) foreign branch plant pennies with innovation billions,” Balsillie said. “I think it’s just outdated thinking, people without the expertise making decisions.”

    Balsillie made the comments in conversation with Financial Post columnist Kevin Carmichael as part of the launch of the Post’s Innovation Nation project.

    Balsillie has argued that the “intangible” economy of data, software and intellectual property is fundamentally different from the classical industrial economy built on the trade of goods and services, and that because Canadian policymakers fail to understand that difference, they keep being taken for rubes.

    On Friday, Balsillie was particularly critical of the federal government’s policy when it comes to “branch plant” investments in Canada in the technology sector.

    He said that in the traditional economy of goods and services, foreign direct investment (FDI) is a good thing, because there’s a multiplier effect — $100 million for a new manufacturing plant or an oil upgrader might create $300 million in spinoff economic activity.

    But if you’re just hiring programmers to write software, the picture is different, he said. It’s a much smaller number of jobs with fewer economic benefits, and, more importantly, the value created through intellectual property flows out of the country.

    “Our FDI approaches have been the same for the intangibles, where, when you bring these companies in, they put a half a dozen people in a lab, they poach the best talent and they poach the IP, and then you lose all the wealth effects,” Balsillie said.

    “Don’t get me wrong. I believe in open economies. They’re going to come here anyway; I just don’t know why we give them the best talent, give them our IP, give them tax credits for the research, give them the red carpet for government relations, don’t allow them to pay taxes, and then have all the wealth flow out of the country.”

    When Carmichael asked about the recent push for tax cuts in Canada to match those enacted by U.S. President Donald Trump, Balsillie suggested that the bigger story is how the U.S. is entrenching its advantage on digital trade.

    “We had lower taxes than the U.S. for 15 years, and our productivity went down, tick, tick, tick, for 15 years,” he said. “Now, what the U.S. has said is that you’ve got a one-time holiday to repatriate all your cash, but from now on all your IP gets taxed in the U.S. so they’re accruing the economic benefits and state power that comes with building those intangible assets.”

    I think they confuse a cheap jobs strategy … (and) foreign branch plant pennies with innovation billions

    Jim Balsillie

    While Balsillie said that for years Ottawa didn’t listen as he sounded the alarm on intellectual property issues, he said he is now getting feedback from politicians that suggests the message is starting to get through.

    During Friday’s conversation, Balsillie also stressed that, if small countries such as Canada make a point of prioritizing the intangible economy, there are huge opportunities. He pointed to Israel, Finland and Singapore as examples of how smart policies and specialization can reap big rewards.

    “I could literally see enormously powerful positions for Canada if we choose the right places. I mean, there are some obvious ones: value added in the food business, and precision data and IP in agriculture; certainly in energy extraction and mining, which are data and technology businesses,” he said.

    “We actually have enormous opportunities to build the resilience and opportunity,” he said. ”And how can you threaten a country with a picture of a Chevy and 25 per cent tariffs when you’ve built these kinds of very powerful innovation infrastructures that you can’t stop with a tariff because they move with the click of a mouse?”

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    Indonesia moves to shore up economy

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    Indonesia announced yesterday a new economic stimulus package to support the rupiah and spur growth in the lead-up to the presidential election in April, which has seen the country’s ailing economy emerging as a critical issue for President Joko Widodo’s administration two months into campaigning.

    The stimulus package includes tax cuts from next year for exporters in the mining, plantation, forestry and fishery sectors which keep their export revenues in the domestic banking system.

    Finance Minister Sri Mulyani Indrawati, one of several ministers fronting a press conference at the presidential palace yesterday, said that a reduction of income tax will apply to the interest of time deposits both in local and foreign currencies deriving from export revenues.

    However, exporters which do not keep their export earnings domestically may be barred from moving their goods overseas.

    “Regarding the export revenues, we will impose an administrative sanction by way of banning exports,” Ms Sri Mulyani added.

    Experts say it is a move to stem capital outflows, which have seen the embattled rupiah plunge to its lowest levels since the 1998 Asian financial crisis.

    Mr Joko had in July met executives from about 40 exporters in Indonesia to also make the case for earnings currently kept offshore to be brought home.

    Mr Satria Sambijantoro, an economist at Bahana Securities, said that by keeping export revenues in the country, the foreign exchange reserves can grow, which will help mitigate capital outflows from Indonesia in the future.

    “In the end, foreign exchange liquidity in domestic banks will remain ample at times of external shocks,” he told The Straits Times.

    To attract foreign investments, the stimulus package will allow for a relaxation of the country’s Negative Investment List for some priority sectors, such as textile printing and weaving, said Industry Minister Airlangga Hartarto.

    The list specifies sectors which are either entirely closed or conditionally open to foreign investment, including oil and gas, trading, pharmaceuticals and transportation.

    Finance Minister Sri Mulyani Indrawati, one of several ministers fronting a press conference at the presidential palace yesterday, said a reduction of income tax will apply to the interest of time deposits both in local and foreign currencies deriving from export revenues.

    With the change, foreign ownership in 54 business sectors, including the steel, chemical and petrochemical industries, can now be 100 per cent, up from the present 30 per cent to 67 per cent.

    Coordinating Economic Minister Darmin Nasution said: “We cannot address the current account (deficit) issue only. We must formulate policies to give investors confidence and allow capital inflows.”

    The rupiah has been on an upward trend since early this month.

    It traded at 14,611 per US dollar on the foreign exchange spot market at yesterday’s closing session versus 14,665 a day earlier, according to data compiled by Bloomberg.

    But analysts warn that risks remain, particularly with imports traditionally spiking during the year-end holidays, which might contribute to a higher current account deficit and a weaker rupiah.

    Mr Mohammad Faisal, executive director of the Centre of Reform on Economics Indonesia, said that with the US intensifying efforts to boost its economy, including adopting a hawkish monetary stance, capital has been sucked out of emerging economies like Indonesia.

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