Japan's firms raised capital spending ahead of U.S. tariffs

Japan Times

3 days ago

Japanese businesses increased capital investment at a faster pace in the first quarter of this year just as U.S. President Donald Trump's administration touted the coming tariff campaign that kicked off in March.
Capital expenditure on goods excluding software gained 1.8% in the three months through March from the previous quarter, when such outlays rose by 1.3%, the Finance Ministry reported Monday. The reading compares with a 1.4% gain in corporate investment reported in the preliminary reading of Japan's gross domestic product. The latest data will be factored into a revised GDP report due for release on June 9.
Compared with a year ago, investment including software increased 6.4%, beating the median estimate of a 3.8% gain. Profits rose 3.8% from a year earlier and sales advanced 4.3%.
Business spending holds the key to the country's economic growth as inflation keeps a lid on household spending and Trump's tariff campaign clouds the trade outlook. The data will be used to revise the first quarter GDP report after the preliminary reading showed a contraction driven by weak trade figures and stalling consumption.
"There will be little impact on the revised GDP figures,' said Takeshi Minami, chief economist at Norinchukin Research Institute. "I think the GDP results will remain negative, as consumption continues to struggle and the tariffs hit exports. I expect negative growth to continue in the April-June period.'
The value of sales and capital investment both reached record levels, with food and steel companies increasing outlays to boost production capacity, a ministry official said.
The tariffs are expected to dent exporters' competitiveness and may reduce their willingness to invest in facilities and raise wages. A 25% tariff on steel and aluminum took effect in March, followed by the assessment of a levy at the same rate on autos and a 10% across-the-board tax starting in April. The across-the-board duty will rise to 24% in early July, barring a trade deal.
"I think capital investment in machinery is slowing down,' Minami said. "The impact of tariffs will become clearer in the April-June period, so I don't think we will see an improvement in capital investment figures.'
Japan's biggest carmakers are likely to take a hit of more than $19 billion from the tariffs as they are heavily reliant on the U.S. market. Toyota, the world's biggest carmaker, will probably sustain the worst hit.
Monday's data come as the government steps up a campaign to encourage corporate investment. An expert panel of the Ministry of Economy, Trade and Industry recommended that when companies have excess funds on hand, they channel the money into capital investment rather than share buybacks, according to an interim report.
The Bank of Japan on May 1 said the slowdown in overseas economies is likely to weigh on exports and production, causing business investment to decelerate. It said that companies are expected to maintain investment to cope with labor shortages and to enhance digitalization and decarbonization.
Japan continues to seek reprieves from the U.S. tariffs while the United Kingdom reached a deal and China agreed upon a tariff truce with Trump. Japan's top trade negotiator Ryosei Akazawa said over the weekend that the latest round of discussions with the Trump administration has put the two nations on track for a deal as early as this month. Akazawa may return to the United States this week, according to NHK.
At home, Prime Minister Shigeru Ishiba's government approved an emergency measure last week to help businesses and households deal with the impact of the tariffs.