Japanese Corporate Spending Insights

By Makiko Yamazaki

TOKYO (Reuters) – Japanese corporate spending on plant and equipment climbed 7.6% in April-June from a year earlier. However, the outlook for business investment has dimmed as manufacturers’ profits decline due to U.S. tariffs.

On one hand, the healthy rise in capital expenditure supports the case for the central bank to raise interest rates later this year.

The same finance ministry data also showed that, while overall recurring profits increased 0.2%, they fell 11.5% for manufacturers, heavily impacted by a 29.7% drop for automakers.

Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, stated: “Japanese exporters have absorbed U.S. tariff costs by cutting prices. As profits get squeezed, caution around investment may grow.”

The pace of capital spending in Q2 accelerated from the previous quarter’s 6.4% gain, growing 1.6% on a seasonally adjusted quarterly basis. This data will be instrumental in calculating revised GDP figures due on September 8.

Preliminary data indicated Japan’s economy expanded by 1.0% annually in Q2, supported by resilient exports and capital expenditure. However, Takeshi Minami, chief economist at Norinchukin Research Institute, noted that this capital expenditure increase was slightly smaller than preliminary GDP estimates, which had included some estimated figures for capital spending. He anticipates a downward revision of GDP growth to 0.8% from the initial 1.0%.

Minami also warned that Japan’s economy might contract for the first time in six quarters in July–September, due to declining exports and sluggish consumer spending.

Other recent economic data suggest widening effects from U.S. tariffs. In July, exports saw their largest monthly decline in nearly four years, driven by price cuts from Japanese automakers absorbing tariff costs. Furthermore, industrial output fell more than expected, partly due to a 6.7% decrease in automobile production.

A Japan-U.S. trade agreement reached in July is expected to reduce U.S. tariffs on Japanese automobiles from 27.5% to 15%; however, uncertainty looms regarding its implementation as U.S. President Donald Trump has not signed the executive order yet.