Japan’s Q1 Capex Increase Hints at Positive GDP Revision

In the January-March period, Japanese companies increased their investment in plant and equipment, driven by a rise in demand for automobiles and efforts to streamline operations. This uptick in capital expenditure suggests that the economic downturn observed in the first quarter might be less severe than previously estimated.

The latest figures indicate a resurgence in private sector-led growth, a key factor for the Bank of Japan as it considers further normalization of its monetary policy. This follows a rate hike in March, the first since 2007. According to the Ministry of Finance, corporate capital spending in Japan grew by 6.8% year-over-year in the first quarter. Despite being the 12th consecutive quarter of gains, the growth rate has decelerated from the previous quarter’s robust 16.4%. Additionally, on a seasonally adjusted quarterly basis, there was a decline of 4.2%, pointing to inconsistent momentum.

These investment figures will play a crucial role in the recalibration of the gross domestic product (GDP) statistics scheduled for release on June 10. Initial estimates had shown a contraction of 2.0% on an annualized basis in the first quarter. Analysts now suggest that these capex figures, combined with public works investment and an increase in inventories, may lead to an adjusted contraction of around 1.8% annualized.

This improved capex data is anticipated to strengthen arguments in favor of the central bank continuing with its policy normalization efforts gradually. Additionally, the Ministry of Finance reported that corporate sales in the first quarter rose by 2.3% from the previous year, while recurring profits surged by 15.1%. Total corporate profits reached 27.4 trillion yen, marking the third highest recorded figure, bolstered by heightened demand in sectors like automotive, chemicals, real estate, and other services. These developments suggest a potential stabilization and gradual recovery of the Japanese economy in the upcoming months.