Japanese firms cut investment as war in Iran clouded outlook

[TOKYO] Japan’s biggest companies reduced capital spending in the first quarter, as corporate sentiment began to sag amid emerging uncertainty from escalating turbulence in the Middle East.

Capital expenditure excluding software fell 3.5 per cent from the previous quarter in the three months through March, the Finance Ministry reported on Monday (Jun 1). In the preliminary gross domestic product report for the same period, corporate investment was reported to have expanded 0.3 per cent.

Spending by non-manufacturers fell 5.1 per cent on quarter, while investment at manufacturers slipped 0.3 per cent.

The data covers a period of transition for the manufacturing sector as uncertainties began to mount. The Bank of Japan’s (BOJ) Tankan survey released Apr 1 showed business sentiment at large manufacturing firms improved for a fourth straight quarter, but the outlooks fell across all sectors.

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.

Monday’s report also showed capital spending including software was flat compared with a year earlier, missing a median economist estimate of 4 per cent growth by a wide margin. Sales edged 1.1 per cent higher from a year earlier, while current profits rose 14.6 per cent, soundly beating expectations.

The mixed signals of weak spending and solid profits may complicate the optics for the BOJ as it considers additional interest rate hikes. The bank is widely expected to raise its benchmark rate at its next decision on Jun 16, with overnight index swaps implying a 79 per cent probability of such a move as of Monday morning in Tokyo.

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 multi-year investment projects focused on economic growth and crisis preparedness.

Industries posting year-on-year declines in capital spending were led by fabricated metal products, where outlays dropped 25 per cent, while information and spending at communication electronics equipment makers fell by about 19 per cent. 

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Petroleum and coal products companies boosted spending 48 per cent 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 per cent year on year, while at petroleum and coal products firms, profits soared 709 per cent. 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 5.1 per cent pay increase on average in this year’s wage negotiations, the country’s largest labor 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.

Monday’s figures will be incorporated into revised first-quarter GDP data due Jun 8. Preliminary data showed Japan’s economy expanded at an annualised 2.1 per cent pace, supported by solid private consumption and net exports. BLOOMBERG