Japanese firms pare growth in capital spending as Trump tariffs hit

Capex on goods excluding software gained for a fifth consecutive quarter in the three months through June, but pace of increase decelerated sharply to 0.2 per cent from 2 per cent in previous period

By Yoshiaki Nohara

 

Japan’s businesses largely reined in growth in capital spending, taking a more cautious view of the outlook as the Trump administration’s tariff campaign intensified.  

Capital expenditure on goods excluding software gained for a fifth consecutive quarter in the three months through June, but the pace of increase decelerated sharply to 0.2 per cent from 2 per cent in the previous period, the Finance Ministry reported Monday. That compares with a 1.3 per cent gain in corporate investment reported in the preliminary reading of Japan’s gross domestic product. The latest reading will be factored into a revised GDP report for the period ended in June due on Sept. 8. 

 

 

Compared with a year ago the figures looked stronger, with investment including software rising 7.6 per cent, compared with the median estimate of a 6.1 per cent gain. Still, Profits only increased 0.2 per cent from a year earlier while sales gained 0.8 per cent, suggesting that companies’ margins are being squeezed as they absorb the impact from US tariffs. 

 

The data provide clues as to how companies are planning for the future at a time when global trade frictions centered largely around US policies have increased economic uncertainties. In the second quarter, the US raised auto tariffs on Japan by an extra 25 per cent and threatened to impose a 25 per cent universal levy on many items from the Asian nation. In July, the two sides struck a deal to set both auto and across-the-board tariffs at 15 per cent, but the deal hasn’t been fully implemented yet. 

 

“Capital investment is currently positive, but companies will likely become more cautious going forward as the impact of Trump’s tariffs intensifies,” said Taro Saito, the head of economic research at NLI Research Institute. “Non-manufacturing sectors are holding steady in terms of profits, but manufacturing, particularly the automotive sector, is deteriorating.”

 

Compared to the previous quarter, profits fell 10.9 per cent for the manufacturing sector in the second quarter, while they only dropped 0.2 per cent for the service sector. 

 

Monday’s data will be used to revise the second-quarter GDP report after the preliminary reading showed faster-than-expected growth. The economy has now expanded for five consecutive quarters. While the lower quarter-on-quarter capex gain reported today points to a possible downward revision for business spending, the data also offered mixed signals with a disparity between manufacturers ramping up investment while service sector businesses cut back on spending.

 

The tariffs are weighing on exporters, raising concerns that their profitability and capacity to raise wages could be compromised along the way. Exports sustained their steepest drop in more than four years in July, extending the streak of declines to three months. Some companies have borne much of the tariff burden, allowing profit margins to shrink in a bid to maintain market share. 

 

A $550 billion investment mechanism, a key pillar in the Japan-US trade deal, has raised some concerns at home that Japanese companies may focus on investing in the US and leave their domestic operations behind. 

Japan’s trade ministry is seeking a tax revision for the year that will start in April to encourage companies to make domestic investments. The aim is to improve their earnings and solidify a positive economic cycle including wage growth, according to the ministry. 

 

The Bank of Japan continues to monitor the impact of the tariffs on the economy as it considers whether to raise interest rates again this year. In its latest outlook report on July 31, the bank said “business fixed investment has been on a moderate increasing trend” while there has been some front-loading and a subsequent reactionary decline in exports and production, due to the US tariffs. The bank is expected to hold rates at its next policy meeting Sept. 19.