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

Japanese companies ramped up their spending on plant and equipment in the second quarter, signaling confidence that could lead to a positive economic outlook and support the case for the Bank of Japan to raise interest rates sooner, according to the Ministry of Finance. Spending increased by 1.6% compared to the same period last year, marking a significant jump from the 0.05% rise in the previous quarter. Seasonally adjusted, spending grew 1.5% on a quarterly basis.

Chief economist Takeshi Minami of Norinchukin Research Institute in Tokyo attributes the surge to strong global growth in AI. He suggests that Japanese companies are compelled to invest more to stay competitive. Combined with Prime Minister Sanae Takaichi's planned investment incentives, this could encourage firms to accelerate capital spending, bolstering domestic demand-driven economic growth. The figures will factor into revised GDP calculations set for September 8.

Preliminary data last month revealed the economy expanded by 1.1% annually over the three months, a slowdown from the 1.9% growth in the previous quarter. However, corporate sales rose 5.9% year-on-year, while recurring profits surged by 24.6% to a record 44.7 trillion yen (US$279.86 billion). Export-oriented manufacturers benefited from a weaker yen and lower U.S. tariffs.

Corporate earnings have largely remained resilient despite recent rate hikes. Minami believes the outlook is robust enough to argue that further rate increases wouldn't be problematic. The Bank of Japan is expected to raise rates during its upcoming meeting on September 17-18 and may adopt a more aggressive policy stance following that session.