(June 1): Japan’s biggest companies reduced capital spending in the first quarter even as ordinary profits at manufacturers reached a record, as emerging uncertainty from escalating turbulence in the Middle East clouded prospects for future growth.
Capital expenditure excluding software fell 3.5% from the previous quarter in the three months through March, the Finance Ministry reported Monday.
The report also showed capital spending including software was flat compared with a year earlier, missing a median economist estimate of 4% growth by a wide margin. Sales edged 1.1% higher from a year earlier, while current profits rose 14.6%, soundly beating expectations.
The data cover a period of transition for the manufacturing sector as uncertainties began to mount. The Bank of Japan’s Tankan survey released April 1 showed business sentiment at large manufacturing firms improved for a fourth straight quarter, but the outlooks fell across all sectors.
“Capital spending came in significantly weaker than expected. While it’s too early to say for certain, we may be starting to see some impact from the Middle East conflict,” Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, said. “It’s also possible that some companies decided at the last minute to hold back planned investment.”
See also: Renault reminds Nissan of its clout with ouster of key director
Oil prices spiked in early March after Tehran responded to the US and Israeli attack by essentially closing the Strait of Hormuz to maritime traffic, shutting off a key conduit for global crude supplies.
The mixed signals of weak spending and solid profits may complicate the optics for the BOJ as it considers additional interest rate hikes. While the decline in spending may point to dimmer growth prospects, the robust profits suggest that companies are financially secure enough to withstand higher interest rates in the near term.
The central bank is widely expected to raise its benchmark rate at its next decision on June 16, with overnight index swaps implying a 79% probability of such a move as of Monday morning in Tokyo.
See also: BOJ governor Ueda to resume work next week after early discharge
The data may be a disappointment for Prime Minister Sanae Takaichi, who has made encouraging private sector spending a cornerstone of her economic agenda. The government plans to set up a funding mechanism outside the regular budget process to support multiyear investment projects focused on economic growth and crisis preparedness.
“With long-term yields rising and markets becoming increasingly sensitive to fiscal risks, I suspect it will be difficult to mobilise investment on a particularly large scale,” Kodama said.
Industries posting year-on-year declines in capital spending were led by fabricated metal products, where outlays dropped 25%, while information and spending at communication electronics equipment makers fell by about 19%.
Petroleum and coal products companies boosted spending 48% year on year, while electrical machinery makers also increased outlays.
Ordinary profits rose across all industries except business oriented machinery, setting a record for the quarter at manufacturers. Information and communication electronics equipment makers saw profits jump 175% year on year, while at petroleum and coal products firms, profits soared 709%. For all industries, sales for the quarter posted a record.
Corporate earnings remain closely watched by policymakers, as healthy profitability underpins wage gains and reinforces the cycle of rising incomes and demand-led inflation. Backed in part by strong earnings, Japanese workers at large firms secured pledges of a 5.05% pay increase on average in this year’s wage negotiations, the country’s largest labour union umbrella group said last month.
BOJ officials have expressed a desire to raise interest rates provided the economy holds up in the face of geopolitical uncertainties. The economy’s performance in the first quarter was much stronger than expected, and data Friday showed further signs of resilience, with industrial production unexpectedly rising in April for the first time since January and retail sales picking up from a month earlier.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
The impact of higher oil costs is already evident. Japan’s corporate goods prices rose in April at the fastest pace in 12 years, driven by higher oil and naphtha costs. The Economy Watchers survey also pointed to deteriorating sentiment at firms, with the current conditions index falling to 40.8 in April from 48.9 in February. More respondents cited supply bottlenecks in that report.
Japanese food and beverage makers will raise prices on more than 1,000 products in June, up from 84 in May, according to Teikoku Databank, partly because chemicals used to make plastic packaging have become more costly.
Monday’s figures will be incorporated into revised first-quarter GDP data due June 8. In the preliminary gross domestic product report for the same period, corporate investment was reported to have expanded 0.3%. That report also showed Japan’s economy expanded at an annualised 2.1% pace, supported by solid private consumption and net exports.
“Corporate investment in the GDP data is likely to be revised down significantly as well,” Kodama said. “Overall economic growth could also end up contracting from the previous quarter.”
Uploaded by Chng Shear Lane
