Cost pressures hit 32-month high
Summary:
Source: Japanese Ministry of Finance; analyst comments from Meiji Yasuda Research Institute and Mizuho Securities
- Japan Q1 capital spending rose just 0.047% year on year, expected 4.0%, prior 6.5%; fell 2.0% on a seasonally adjusted quarterly basis
- Capital spending ex-software fell 1.4% year on year, expected 5.4%, prior 7.3%
- Manufacturer capex fell 0.4% year on year as information and communications equipment and automotive sectors pulled back after last year’s capacity expansion
- Capex hit a fresh quarterly record of 18.8 trillion yen in nominal terms despite the slowdown
- Company profits rose 14.6% year on year, well above the 5.3% forecast; company sales rose 1.1%
- Meiji Yasuda Research Institute economist Kazutaka Maeda said results were weaker than expected and that the data suggests Q1 GDP may be revised down from the preliminary 2.1% annualised estimate; the revision is due June 8
- Mizuho Securities said monetary policy adjustments and Middle East tensions are likely to keep domestic capex growth subdued near term
Japanese corporate capital spending ground to a near halt in the first quarter, rising just 0.047% year on year after four consecutive quarters of robust expansion, in a result that analysts say points to a downward revision of Japan’s preliminary first-quarter GDP estimate when revised data is published on June 8.
Japan Q1 Capital Spending: 0.047% y/y
- expected 4.0%, prior 6.5%
Japan Q1 Capital Spending ex-Software: -1.4% y/y
- expected 5.4%, prior 7.3%
Japan Q1 Company Sales: 1.1% y/y
- prior 0.7%
Japan Q1 Company Profits: 14.6% y/y
- expected 5.3%, prior 4.7%
The Ministry of Finance data showed capex fell 2% on a seasonally adjusted quarterly basis, with manufacturer spending down 0.4% year on year as the information and communications equipment and automotive sectors scaled back following last year’s capacity expansion drive. In nominal terms capex still hit a fresh quarterly record of 18.8 trillion yen, reflecting the elevated price environment rather than volume growth.
Kazutaka Maeda, economist at Meiji Yasuda Research Institute, said the results were weaker than expected and reflected a pullback from earlier strength, adding that the capex figures suggest the preliminary Q1 GDP reading of 2.1% annualised growth may be revised lower. He cautioned that while labour-saving investment demand should provide a floor, the trajectory from here will depend heavily on Middle East developments.
The profit picture was sharply better than the capex story suggested, with company recurring profits rising 14.6% year on year against a 5.3% forecast, and sales up 1.1%. The gap between strong earnings and stalled investment points to corporate caution rather than financial constraint, a tension that sits at the centre of Prime Minister Sanae Takaichi’s economic agenda.
Takaichi’s government has been pushing firms to deploy accumulated cash reserves into productive investment through tax credits, increased public spending on strategic sectors including semiconductors and shipbuilding, and a revised corporate governance code designed to pressure boards into justifying idle balance sheet cash. Japan’s official target is to double annual corporate capex to 200 trillion yen by 2040.
Near-term prospects remain clouded. Mizuho Securities said in a recent report that monetary policy adjustments and ongoing Middle East tensions are likely to keep domestic capital investment growth subdued, a view that the Q1 data does little to contradict.
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The near-zero capex print feeds directly into the June 8 GDP revision and raises the probability that Japan’s preliminary 2.1% annualised Q1 expansion is marked down, which would complicate the BOJ’s case for a June rate hike even as the manufacturing PMI and price data argue for one. Yen and JGB markets will weigh the tension between a strong profit result, up 14.6% year on year, and the stall in actual investment deployment, which suggests corporate caution rather than balance sheet inability
