Japan Q2 corporate capital spending rises, but profits tumble

JAPAN - TOKYO. Japanese companies raised spending on plant and equipment in April-June for the 11th straight quarter, with investment led by the service sector and underscoring capital expenditure's resilience.

However, spending on manufacturing fell for the first time in two years in a sign the simmering Sino-U.S. trade war and slowing global growth are taking a toll on Japanese factory activity.

Firms raised capital spending by 1.9% in the second quarter from the same period a year earlier, Ministry of Finance data showed on Monday. On a seasonally-adjusted basis, capital expenditure grew 1.5 percent quarter-on-quarter in April-June.

Some analysts say the data, which will be used to calculate revised gross domestic product figures due on Sept. 9, pointed to a slight downward revision to the upcoming GDP data.

"The capex component of GDP will be revised down slightly, weighing on overall growth," said Toru Suehiro, senior market economist at Mizuho Securities.

"As uncertainty over the global economy heightens even more due to the intensifying U.S.-China trade war, Japanese firms are likely to hold off from boosting capex from now on," he said.

A tit-for-tat tariff war between the United States and China now involves hundreds of billions of dollars of each country's goods and threatens global economic growth. Both sides imposed new tariffs on Sunday in the latest escalation, though Washington says face-to-face trade talks will resume sometime this month.

In Japan, a scheduled sales tax hike to 10% from the current 8% in October could undermine private consumption that constitutes about 60% of the world's third-largest economy, adding to uncertainty.

The previous tax hike from 5% in April 2014 dealt a blow to consumers and triggered a deep downturn in a broader economy.

Capital expenditure has been a bright spot, however.

Companies are refurbishing old equipment and boosting investment in automation and labour-saving technology to cope with labour shortages in an ageing society, although manufacturers have increasingly grown wary about boosting capex.

Manufacturers' capex fell 6.9% on-year, weighed by information and communications machinery, oil and coal, while non-manufacturers' spending rose 7.0% led by real estate and leasing of goods.

Monday's data also showed corporate recurring profits fell 12.0% in April-June from a year earlier, swinging from a 10.3% gain in the previous period.

Sales rose a meagre 0.4%, up for a 11th straight quarter but slowing sharply from the previous period's 3.0% gain.

A revised manufacturing survey on Monday showed Japanese manufacturing activity fell for a fourth straight month in August, with output and total new orders continuing to slide.

A preliminary reading out last month showed Japan's economy expanded a much-faster-than-expected 1.8% in April-June as solid household and business spending offset the blow to exports from trade frictions and weak external demand.