Japanese companies raised capital spending in the second quarter as profits surged, in the latest sign that the corporate sector is coping fairly well with the fallout from the Middle East conflict.
Capital expenditure excluding software gained 2.9% from the previous quarter in the three months through June, the Finance Ministry reported Tuesday. Capital spending including software rose 1.6% from a year ago, compared with a median economist estimate of a 0.3% drop. Sales rose 5.9% from a year earlier, while current profits advanced 24.6%, soundly beating estimates.
The results likely point to an upward revision to second-quarter gross domestic product data when the final figures are released on Sept. 8. In the preliminary reading, corporate investment declined 1.2% and consumer spending was flat, both missing estimates. As a result, the economy expanded at a slower pace than in the previous quarter.
“Non-manufacturing companies continue to invest in AI to reduce labor costs, but manufacturers remain cautious about capital investment against the backdrop of the situation in Iran even though their profits are rising,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “I believe the data will have a positive effect on GDP.”
The strong corporate spending figure was more or less in line with the Bank of Japan’s Tankan survey of business sentiment released in early July that showed large firms projected capital spending would grow 11.5% in the year ending next March, up from a previous forecast of 3.3%. The outcome will keep the BOJ on track for a near-term interest rate hike, possibly as soon as Sept. 18.
The data also were consistent with recent data reflecting the corporate sector’s resilience. Businesses have faced rising operating costs due in part to supply-chain disruptions resulting from the war in Iran, but the weak yen has helped soften that blow for exporters. Activity in the manufacturing sector has been expansionary every month this year.
“Looking ahead, although tensions over the situation in Iran are likely to persist, I believe companies will still need to make a certain level of capital investment,” Minami said. “Therefore, I expect capital investment that had been postponed to gradually materialize in the July-September quarter.”
