Japanese corporate spending on plant and equipment climbed 7.6% in April-June from a year earlier, but the outlook for business investment has clouded as manufacturers' profits slide on pain caused by U.S. tariffs.
On one hand, the healthy rise in capital expenditure signals supports the case for the central bank to raise interest rates again later this year.
The same finance ministry data also showed, however, that while overall, recurring profits increased 0.2%, they tumbled 11.5% for manufacturers, led by a 29.7% plunge for automakers.
"Japanese exporters have so far mostly absorbed the U.S. tariff costs by cutting prices. As their profits get increasingly squeezed, they could inevitably turn cautious about investment," said Kazutaka Maeda, economist at Meiji Yasuda Research Institute.
The pace of capital spending in the second quarter accelerated from the previous quarter's 6.4% gain. It grew 1.6% on a seasonally adjusted quarterly basis.
The data will be used to calculate revised gross domestic product figures due on September 8.
Preliminary data last month showed Japan's economy expanded by a faster-than-expected 1.0% on an annualised basis in the second quarter, helped by surprisingly resilient exports and capital expenditure.
Takeshi Minami, chief economist at Norinchukin Research Institute, said in a report that the capital expenditure increase in Monday's data was slightly smaller than the one in the preliminary GDP data for April-June, which had included some assumed figures for capital expenditure.
He predicts GDP growth will be revised down to an annualised 0.8% from a preliminary 1.0%.
He also said Japan's economy may contract for the first time in six quarters in the July–September period, due to weaker exports and sluggish consumer spending.
Other economic data released in the past few weeks also suggest that U.S. tariffs are taking a toll.
Exports in July logged the biggest monthly drop in about four years due to price cuts by Japanese automakers to absorb tariff costs, while industrial output slumped more than expected due partly to a 6.7% decline in automobile production.
A Japan-U.S. trade agreement in July is likely to lower U.S. tariffs on Japanese automobiles to 15% from 27.5%, but there is uncertainty about when the cut will apply, as U.S. President Donald Trump has yet to sign an executive order.
