Japanese businesses cut spending for an 11th quarter even as their earnings rebounded, signaling a revival in exports remains insufficient to prompt investment that would spur the recovery.
Capital spending excluding software fell 18.5 percent in the three months ended Dec. 31 from a year earlier, the Finance Ministry said today in Tokyo. Sales declined and profits doubled.
Sony Corp. and Panasonic Corp. are among companies cutting costs to protect earnings even as demand from abroad picks up. A stronger yen is forcing exporters to invest overseas rather than at home, and deflation is discouraging spending by domestic service companies, said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co.
“We’re seeing a clear contrast between the rapid recovery in profits and the weakness in capital spending,” Tokyo-based Miyazaki said. “The recovery’s spillover to capital spending has been particularly weak this time, even in comparison to the economic recoveries of the past.”
The yen traded at 88.34 per dollar at 3:12 p.m. in Tokyo after earlier touching 88.31, the highest since Dec. 11. Japan’s currency has gained more than 5 percent this year, eroding the value of exporters’ repatriated profits. The Nikkei 225 Stock Average fell 1.1 percent, extending its losses to 3.8 percent for the year.
Slower Growth
Based on today’s data, the Cabinet Office may revise fourth-quarter economic growth figures lower on March 11. Gross domestic product probably expanded at an annual 3.9 percent pace, slower than the 4.6 percent reported last month, according to the median forecast of 13 economists surveyed by Bloomberg News after today’s figures were released.
The capital spending component likely rose 0.3 percent from the previous quarter, compared with a 1 percent increase in the preliminary report, economists said.
“Capital spending may have hit bottom, but the strength of the rebound is still in question,” said Naoki Tsuchiyama, market economist at Mizuho Securities Co. in Tokyo, who estimates a GDP downgrade to 3.7 percent. “The economic recovery is largely dependent on government stimulus and companies are still cautious about the outlook for final demand.”
Companies’ sales slid 3.1 percent last quarter after tumbling 15.7 percent the previous three months, the ministry said. Profits surged 102.2 percent, the first increase in 10 quarters and the second biggest advance since the survey began in 1955.
Weak Link
Business spending remains the weak link of a recovery that’s being driven by exports and showing signs of improvement in the labor market. About a third of factory capacity is sitting idle in the wake of the nation’s worst postwar recession, discouraging companies from buying equipment free credit score.
“Capital spending may start growing later this fiscal year, but the pace of the recovery will be very moderate,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. “Companies still have excess capacity, so they will try to utilize existing facilities rather than building new plants.”
Sony last month narrowed its forecast for a net loss, saying it is approaching its target of trimming 330 billion yen in costs by eliminating jobs and shutting factories. Capital spending for this fiscal year will probably total 220 billion yen, 34 percent less than a year earlier and lower than the 250 billion yen estimated in October, Sony said on Feb. 4.
Raising Forecasts
Panasonic last month raised its operating profit forecast, as cuts in fixed and material costs lead to a recovery in earnings from consumer electronics and appliances. Capital investment for the nine months ended Dec. 31 stood at 275.6 billion yen, 22 percent less than the same period a year earlier, according to a company statement.
Slumping prices also are squeezing profit margins. Consumer prices excluding food and energy dropped 1.2 percent in January, matching December’s record decline, the government said last week.
Finance Minister Naoto Kan renewed calls on the Bank of Japan to help arrest deflation this week, saying he hopes prices will rise this year.
The government has been encouraging spending by providing incentives to buy cars and consumer electronics. Those initiatives are becoming less effective, said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs Group Inc.
“Not only is capital investment slack but the demand boost from policies to stimulate replacement purchase of energy-saving electrical goods and environment-friendly autos is fading,” Yamakawa said.
Asia Rebound
Still, some companies are benefiting from rebounding demand in Asia, particularly China, the world’s fastest-growing major economy and Japan’s biggest overseas market.
Hitachi Construction Machinery Co., Asia’s second-largest excavator maker, may double sales in China this quarter, beating its forecast as the nation’s spending on railroads and mining fuels demand, Chief Executive Officer Michijiro Kikawa said in an interview on March 1.
Japanese manufacturers increased output in January at the fastest pace since May and exports climbed the most in almost 30 years, government reports showed last month.
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Design Within Reach will soon require a lot more effort, as the chain closes its midtown store at 16th and J streets.
The company confirmed it would close the 2,700-square-foot store at 1020 16th St. — in the ground-floor of the Loftwork’s o1 Lofts development, which includes Bistro 33 Midtown and P.F. Chang’s China Bistro. Design Within Reach will close March 15, with a 30 percent-off sale until then, a company spokeswoman said paydayloans.
The San Francisco-based company, which has about 60 of the boutique stores featuring cool and trendy furniture nationwide, is the latest to close its local outlet during the recession. Two employees work at the store.
The company has a Berkeley and three San Francisco stores, the soon-to-be closest outlets to Sacramento.
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The nation’s second-largest shopping mall operator, General Growth Properties Inc., said Wednesday that it reached a deal with Canada’s Brookfield Asset Management Inc. that will speed its exit from Chapter 11 bankruptcy protection.
Speculation raged for weeks that General Growth might turn to Brookfield, which has been looking to expand its slate of U.S. retail properties and last year acquired an undisclosed stake in the company.
General Growth, in turn, could thwart last week’s $10 billion takeover bid from Simon Property Group Inc. The No. 1 shopping mall operator controls some 382 properties worldwide including the Regency Plaza center in St. Charles, St. Louis Mills mall in Hazelwood and Lincoln Crossing in O’Fallon, Ill.
General Growth rebuffed the unsolicited offer from Simon for being too low cash advance to savings account. A Simon spokeswoman didn’t have a comment.
General Growth owns or manages 200 shopping malls in 44 states, including St. Louis Galleria. The company racked up $27 billion in debt by the time it sought shelter from creditors last April, making it the largest real estate bankruptcy case in U.S. history.
As part of the new plan, General Growth would spin off some assets as a new company named General Growth Opportunities, which would essentially hold assets the company concedes aren’t producing much income currently, including the company’s master planned communities and some large retail hubs, such as the South Street Seaport in New York.
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Defense contractor Technica Corp. expects to double its presence in Columbia by the fall as it expands from Northern Virginia into Greater Baltimore.
As the Baltimore Business Journal reported Friday, the company has leased a 7,600-square-foot facility at the Columbia Gateway business park in Howard County.
Mark O’Donnell, senior vice president of business development for Technica, said his company plans to expand its space at 6750 Alexander Bell Drive to 14,000 square feet by the fall. By then the Dulles, Va.-based company hopes to have hired or shifted as many as 45 workers to the area.
The timing of the company’s move, and others like it, has been a matter of much debate among the region’s real estate and economic development community since 2005.
That’s because Technica is one of dozens of defense contractors to the federal Defense Information Systems Agency, an arm of the U.S. Defense Department focused on communication part of the Pentagon focused on cyber security and other areas of information technology.
DISA is relocating from Arlington, Va., to Fort George G. Meade in Anne Arundel County as part of the Pentagon’s Base Realignment and Closure plan. BRAC, as the plan is known, is expected to bring about 25,000 government and private contracting jobs to Central Maryland. The bulk of those jobs are being shifted to Fort Meade and Aberdeen Proving Ground in Harford County. The BRAC moves are slated to be completed by September 2011.
The shift should create a significant demand for new homes, office space, restaurants and shops supporting the new workers. But few of those moves have taken place yet, leaving many developers to wonder when to expect the demand for those new projects will pick up.
Several projects have been put on hold until that happens, and many developers have been unable to finance their projects until they have signed tenants to take space in them.
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Hawaii lawmakers are considering renaming the soon-to-open Kapolei Court Complex after Chief Justice Ronald Moon.
Senate Concurrent Resolution No. 38 was introduced by Senate President Colleen Hanabusa and Sen. Brian Taniguchi, chairman of the Senate Judiciary and Government Operations Committee. Both are Democrats.
It proposes renaming the new $124.5 million Kapolei Court Complex the “Ronald T.Y. Moon Judicial Complex.”
Moon spearheaded development of the West Oahu court complex, which will open March 29 after more than 20 years of planning and nearly three years under construction. It will serve as the new home of family court for the 1st Judicial Circuit.
Under state law, Moon must retire as chief justice of the Hawaii Supreme Court when he turns 70 this September, capping a more than 40-year legal career in Hawaii. He was named to the state’s highest court in 1993.
The resolution is nonbinding but serves as a recommendation, in this case, to the governor, the state comptroller and the administrative director of the state’s courts.
The Senate Judiciary Committee will have a public hearing on the resolution at 9:30 a.m. on Tuesday at the State Capitol.
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European Central Bank Governing Council member Athanasios Orphanides said the bank will continue to support the economy even as it unwinds its emergency lending measures, suggesting interest rates may remain at a record low for some time.
“The phasing out of some unconventional measures should not be misinterpreted as a desire to remove policy accommodation from the economy,” Orphanides, who heads the central bank of Cyprus, said in an interview in Nicosia on Feb. 12. “Policy accommodation continues to be needed in light of the very subdued inflation outlook and the unevenness and weakness of the economy.”
The Frankfurt-based ECB has started to withdraw the measures it used to fight the financial crisis and economists last month predicted it would raise the benchmark rate from 1 percent in the fourth quarter. Still, the euro-area economy barely expanded in the final quarter of last year and the fiscal crisis gripping the region may weigh on growth and inflation as governments cut spending to reduce budget deficits.
Orphanides’ comments “confirm our call that the ECB will not raise rates this year,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “He sounds very concerned about the outlook for both growth and inflation.”
The euro eased to $1.3613 after the interview was published from $1.3622.
‘Subdued’ Inflation
Orphanides, a former U.S. Federal Reserve economist, said the “evolution of the economy and the associated risks to price stability are the key” to the rate outlook.
“If events over the next several months are consistent with inflation remaining subdued and considerably below our price-stability objective, that would indicate that the accommodative policy should remain in place,” he said.
The ECB in December predicted growth of 0.8 percent this year and 1.2 percent in 2011. Inflation was projected to average 1.3 percent this year and 1.4 percent next year. The ECB aims to keep the rate just below 2 percent.
Orphanides said preventing inflation from dropping too far below the ECB’s goal is as important as keeping a lid on price increases.
‘Symmetrical’ Policy
“The most important element is to be symmetrical in the pursuit of our price-stability objective,” he said. “I am concerned that if HICP inflation stays significantly below our definition of price stability for an extended period, this deviation could become embedded in longer term inflation expectations business cards. This would be an unwelcome development.”
In its latest quarterly survey of professional forecasters published on Feb. 11, the ECB said five-year inflation expectations stayed at 1.9 percent. However, forecasters lowered their 2011 inflation prediction to 1.5 percent from 1.6 percent.
Orphanides said he would be “more comfortable” if 2011 expectations “moved closer to our definition of price stability rather than a little bit away from it.” The current inflation rate of 1 percent also “confirms the appropriateness of continuing with an accommodative monetary-policy stance,” he said.
The 16-nation economy grew just 0.1 percent in the fourth quarter from the third, the European Union’s statistics office said Feb. 12. Economists had forecast 0.3 percent growth.
Weaker Growth
Growth “was a little bit weaker than the baseline scenario,” said Orphanides. “We are monitoring the improvements in the economy overall, but at the same time we also note the weakness in the money figures as well as the weakness in credit growth. Those are in my view consistent with the recovery not being very strong at the moment.”
The ECB’s 22-member Governing Council will decide at its next policy meeting on March 4 whether to further scale back its emergency lending measures. It has already announced the end of its 12 and 6-month loans to banks and indicated it may return to an auction procedure in some of its refinancing operations as a next step.
“The longer our interventions remain in effect, the more dangerous the side effects become,” ECB Executive Board member Juergen Stark told Germany’s Spiegel magazine in an interview published today.
Orphanides indicated he favors leaving full allotment in the main weekly refinancing operation in place for the time being.
“In the circumstances we are in at present, with very low short-term nominal interest rates, it’s very hard to assess precisely what the demand for liquidity in the banking sector is,” he said. “For that reason it is entirely sensible to have a procedure that can flexibly meet variations in the demand for liquidity, and that is what our fixed-rate, full-allotment policy is doing.”
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Dubai is reportedly preparing to sell a host of assets, including one of the world’s best known cruise ships, as the emirate’s investment arm looks to restructure a mountain of debt.
The Queen Elizabeth II, or QE2, is rumored to be one of the assets that Dubai’s state-run private equity firm, Istithmar World, is planning to sell. An Istithmar spokesman did not respond to requests for comment on Tuesday.
However, a company spokesman told Arabian Business that "there are a number of options being considered for QE2. IW is considering which option will best maximise value of the vessel."
Istithmar bought the QE2, once the largest passenger ship in existence, in 2007 for an estimated $100 million. The firm had planned to turn the ship into a floating hotel attached to a man-made, palm-shaped island in the Persian Gulf.
Also in the firm’s portfolio is a 20% stake in Canadian circus group Cirque du Soleil. But a Cirque du Soleil spokeswoman said the group has had no indication from Istithmar that a sale is pending.
Any proceeds from the asset sales would probably be used to pay down the $22 billion in debts that Dubai World, the parent company of Istithmar, took on during a multiyear, global property binge.
Dubai was one of the first sovereign nations to run into serious debt problems as a result of the global economic downturn payday loan lenders. The fallout has now spread to Europe, where Greece and other countries are struggling to slash budget deficits and repay mountains of debt.
Dubai World, the investment arm of Dubai, rattled financial markets late last year when it signaled that it couldn’t make payments on its debts. The company received a $10 billion bailout in November from fellow emirate Abu Dhabi and is working with creditors to restructure its debt load.
As a result, Istithmar has already been forced to sell some assets at a loss. In December, the firm sold the W Hotel in New York for only $2 million in a foreclosure auction. It reportedly paid more than $200 million for the boutique hotel in 2006.
Last week, Istithmar sold its stake in Indian budget airline SpiceJet for $37 million. It also recently announced plans to sell port and shipping agent Inchcape Shipping Services for $700 million.
Despite the recent asset sales, Istithmar still has a large portfolio of investments and properties, including a large stake in book publishing giants Houghton Mifflin and Harcourt Education. It also has interests in U.K.-based Pension Insurance Corporation Holdings and Perella Weinberg Partners, a New York-based investment firm.
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The Obama White House likes to say that the theories of John Maynard Keynes form the foundation for its fiscal policies. Most notably, it draws upon the legendary British economist’s idea of spending big to pull out of a recession.
But one economist says the administration has gotten Keynes only half right. Allan Meltzer of Carnegie Mellon is one of the most influential monetarists of the past 50 years. He has served in the Department of the Treasury under President Kennedy and on the Council of Economic Advisors during the Reagan Administration. He also authored the book, Keynes’s Monetary Theory: A Different Interpretation.
While the Obama team is laying out huge sums of money, Meltzer says it’s neglecting a key part of Keynes’ plan: You can’t run up a debt without a way to cover it.
Meltzer recently sat down with Fortune editor-at-large Shawn Tully. Below are edited excerpts from their conversation.
If Keynes were alive today, what would he think of President Obama’s fiscal policies?
He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It’s true that we’re stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.
Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn’t understand that the proper policy in a democracy recognizes that today’s increase in debt must be paid in the future.
We paid down wartime deficits. Now we have continuous deficits. We used to have a rule people believed in, balanced budgets. And now that’s gone.
Didn’t Keynes advocate temporary deficit spending in a recession?
Keynes wanted deficits to be cyclical and temporary. He wouldn’t have been in favor of efforts to raise tax rates in a recession to eliminate deficits. He viewed that as suicidal. He was opposed to the idea that governments should balance the budget during a downturn, and advocated running short-term deficits to spur the economy.
The type of stimulus he advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending, as the source of durable job creation. He also said that the deficits should be self-liquidating, so that the increased economic activity caused by the stimulus inevitably generated a combination of extra tax revenues and lower unemployment payments. With higher revenues and lower outlays, the deficit would disappear.
The Obama administration’s main objective, in the name of Keynes, is boosting consumption. That sounds very different from the focus on investment that you say Keynes advocated.
Keynes didn’t favor at any time that I know spending to increase consumption. He didn’t want that, and in fact he believed that was taken care of by the marketplace.
Keynes wanted to increase employment by smoothing the amount of investment through the up and down parts of the business cycle. He knew that recessions cause a decline in investment, and that the fall in investment caused unemployment to rise. So he wanted the government to stabilize investment through a recession.
What specific policies did Keynes advocate for smoothing investment?
Keynes is very vague on the subject. He believed that the government should plan and direct investment, but not nationalize it. He talked about how well utilities were run under state regulation in Britain. Keynes wanted to apply that model to more of the economy. He thought government planning of investment was the best way to reduce risk for private companies and lower interest rates to spur investment.
Did Keynes champion tax cuts or government spending increases in a recession?
Again, he was extremely vague. On spending, he did say that deficits should be temporary and self-liquidating. He clearly did not advocate long-term spending in excess of revenues, since that causes structural deficits. Nor did he specifically recommend tax reductions for individuals or companies. Those types of cuts, however, are an obvious way to achieve his goal of boosting investment in a recession. And it’s been used with great success by his Keynesian disciples. For example, the Kennedy Administration tax cuts were championed by Keynesian economists, and proved very successful at raising investment.
And one of the leading Keynesians, Franco Modigliani, developed a theory of consumption stating that temporary tax cuts are mainly saved or used to reduce debt. Milton Friedman, the ultimate champion of free markets, independently developed an alternative model that came to the same conclusion. The temporary reductions under Carter, George W. Bush and Obama were all failures, since people spend more only when they’re confident their take home pay will rise permanently.
This is standard economic theory that the current administration ignores.
What would Keynes think of Obama’s stimulus plan?
It’s unbelievable that a man whose main theme was to smooth investment comes to be the proponent of redistributing income away from the people and companies who do the investing.
My advice on the stimulus plan was, don’t do it. Let’s look at the plan. First, a lot of the money was used to reduce the deficits of state and local governments by increasing the federal debt. It was simply money transferred from the federal government. The economic multiplier effect was zero. Second, the temporary tax cuts went to paying off credit cards and other debts, not spending that would have increased economic growth.
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Aircraft makers such as EADS’s Airbus and Boeing Co. are counting on Asia to pull the industry out of a slump and spur growth for years to come, executives said Wednesday.
Fueled by a growing middle class eager to travel, the region will need about 8,000 planes costing $1.2 trillion by 2028, France’s Airbus estimates. Passenger traffic in Asia is likely to grow an annual average of 5.9 percent in the next 20 years, overtaking the United States and Europe to become the largest air transport market, said Airbus, the world’s biggest airplane maker.
"We’re very optimistic this region will play a leading role in global economic growth and particularly aviation," Airbus Chief Executive Tom Enders said at the Singapore Airshow.
Global passenger traffic dropped about 2 percent last year amid a recession in most developed countries. Most Asian countries, meanwhile, continued to expand in 2009, and growing populations and vibrant economies are making the region the center of the aviation business.
Domestic air travel in China rose 21 percent last year, and Boeing estimates the Chinese market will need about 3,800 airplanes costing $400 billion over the next 20 years.
Aircraft makers are targeting local carriers such as Garuda Indonesia, which will receive 23 planes from Boeing and one from Airbus this year, part of a plan to boost its fleet by three quarters to 116 planes by 2014.
Niche players also are eyeing Asia. EADS unit Eurocopter, which says it has about half of Asia’s helicopter market, expects demand to grow at least 10 percent a year for the next decade.
If regulations that limit helicopter use in China and India are lifted, demand will explode further, said Eurocopter CEO Lutz Bertling.
"The Asian market is for sure the fastest growing," Bertling said. "It’s going to be bigger than the U.S. by 2020."
Diversified Restaurant Holdings Inc. has bought nine Buffalo Wild Wings Grill & Bar locations, including three in the Tampa Bay area.
The company, based in Southfield, Mich., said it exercised its option to buy the restaurants in Brandon, Fish Hawk Ranch and Sarasota, plus another three in Michigan, for $3.1 million.
Diversified (OTC BB: DFRH) already managed the locations, which generated $18.3 million in revenue during the nine months ended Sept. 30. DRH’s management fee was 15.9 percent for that time, a release said.
The company received the right to exercise the purchase option as part of its initial public offering in August 2008. The deal was financed through a 6-year promissory note from the sellers, the company said.
Diversified (OTC BB: DFRH) now owns 16 Buffalo Wild Wings locations, including five in Florida.
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