Japan’s Companies Boost Capital Investment as Profits Surge

Japanese firms increased capital spending in the second quarter, as profits soared, signaling that the corporate sector is managing well despite the impact of the Middle East conflict. Capital expenditure, excluding software, grew by 2.9% from the prior quarter in the three months leading up to June, according to the Finance Ministry's report on Tuesday.

Including software, capital spending rose by 1.6% compared to a year ago, contrary to economists' median prediction of a 0.3% decline. Sales increased by 5.9% year-over-year, while current profits jumped by 24.6%, significantly exceeding expectations. These results suggest that GDP figures may be revised upwards when the final data are released on September 8.

Preliminary data showed corporate investment dropping by 1.2% and consumer spending remaining stagnant, both falling short of estimates. Consequently, the economy expanded at a slower rate than in the previous quarter. Takeshi Minami, chief economist at Norinchukin Research Institute, noted that non-manufacturing companies are investing in AI to cut labor costs, but manufacturers remain hesitant about capital investment due to the Iran situation, even though profits are rising.

Minami believes the data will positively influence GDP. The strong corporate spending figure aligns with the Bank of Japan's Tankan survey of business sentiment, which indicated that large firms expected capital spending to grow by 11.5% in the year ending next March, up from an earlier forecast of 3.3%. The outcome supports the Bank of Japan's anticipated near-term interest rate hike, possibly as early as September 18.

The data also reflect the corporate sector's resilience, with businesses facing rising operating costs due to supply-chain disruptions from the Iran war, but the weak yen has helped mitigate the impact for exporters. Manufacturing activity has been expanding throughout the year. Minami expects capital investment, which was postponed, to gradually materialize in the July-September quarter despite the ongoing tensions in Iran.