Japan capital spending gathers pace, bolstering economic outlook and BOJ hike case

Japanese firms significantly ramped up their investments in plant and equipment during April-June, indicating growing business confidence and potentially boosting the economy's growth outlook, according to recent Ministry of Finance data. The capital spending surged 1.6% compared to the same period last year, a sharp increase from just 0.05% in the previous quarter, with a 1.5% rise on a seasonally adjusted basis.

Takeshi Minami, a chief economist at Norinchukin Research Institute, attributes this surge to the strong global growth in artificial intelligence, which is pushing Japanese companies to invest more to stay competitive. Coupled with Prime Minister Sanae Takaichi's planned investment incentives, this could push Japanese firms to accelerate capital spending, further bolstering the business investment outlook.

The revised data will be used to calculate the updated gross domestic product figures, due on September 8. Preliminary data from last month revealed the economy expanded by 1.1% annually over the three months, a decline from the 1.9% growth in the previous quarter, as household and business spending weakened. However, corporate sales rose 5.9% year-on-year, and recurring profit surged 24.6% to a record 44.7 trillion yen.

Despite recent rate hikes, corporate earnings have weathered the potential negative impact, and the outlook is strong enough to support further rate increases. The Bank of Japan is expected to raise rates during its September 17-18 meeting and may consider more aggressive hikes afterward, with sources stating that the BOJ is set to increase rates as soon as that meeting.