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

Japanese firms ramped up plant and equipment spending in the April-June quarter, reflecting growing business confidence that may lead to a positive economic growth outlook and a case for the Bank of Japan to raise rates sooner than expected. Capital spending surged 1.6% compared to the same period last year, accelerating from a mere 0.05% increase in the previous quarter, according to Ministry of Finance data.

Seasonally adjusted quarterly growth stood at 1.5%. Leading Japanese economist Takeshi Minami attributes this surge to strong global AI growth, compelling companies to invest more to stay competitive. Coupled with Prime Minister Sanae Takaichi's fiscal spending plan, this could spur Japanese firms to accelerate capital spending, supporting a robust outlook for business investment.

The revised GDP figures, expected on September 8, will utilize these figures. Preliminary data from the previous quarter indicated an annualized growth of 1.1%, down from 1.9%, as household and business spending slowed. However, corporate sales rose 5.9% year-on-year, and recurring profits hit a record 44.7 trillion yen ($279.86 billion).

Export-oriented manufacturers benefited from a weaker yen and lower U.S. tariffs. Despite recent rate hikes, corporate earnings have remained resilient, and the outlook remains strong, suggesting further rate increases would not be problematic, according to Minami. Sources indicate the BOJ will likely raise rates at the upcoming September 17-18 meeting and consider more aggressive hikes thereafter.

Prime Minister Takaichi's fiscal spending pledge aims to stimulate private investment, focusing on sectors crucial to long-term growth such as AI, semiconductors, advanced manufacturing, and energy infrastructure.