Japanese Corporate Spending Rises as Profits Hit Record Highs

Japanese companies increased spending on plant and equipment by 1.6 percent year-on-year during the second quarter from April to June, accelerating from a 0.05 percent increase in the previous quarter. Data from the Ministry of Finance shows that capital expenditure excluding software grew 2.9 percent from the previous quarter, exceeding economist expectations. This growth coincided with a 24.6 percent surge in recurring corporate profits, which reached a record 44.7 trillion yen, while sales rose 5.9 percent year-over-year.

Sanae Takaichi and the Government of Japan have encouraged this trend through planned investment incentives focusing on semiconductors, advanced manufacturing, and energy infrastructure to combat labor shortages. While non-manufacturing firms are investing in AI to reduce labor costs, manufacturers remain cautious due to ongoing conflict in Iran. Exporters have also benefited from a weak yen.

The corporate resilience is expected to lead to an upward revision of second-quarter gross domestic product data on September 8. These strong investment figures align with the Bank of Japan's Tankan survey and strengthen the case for near-term interest rate hikes. The central bank is expected to raise rates as early as its September 17 to 18 meeting and may consider a more aggressive hiking pace thereafter.