Japan’s Firms Lift Outlays in Sign of Modest Domestic Demand

Japanese businesses boosted investment in the second quarter of the year, reaffirming signs of moderate domestic demand-led activity after growth rebounded in the period.
Capital expenditures on goods excluding software rose 1.9% in the three months through June from the previous quarter, the finance ministry reported Monday. The reading was stronger than the reading for business investment in gross domestic product data released earlier by the Cabinet Office, which showed such spending increased 0.9% from the previous quarter. 
Spending on equipment including software grew 7.4% from a year earlier, rising for a 13th consecutive quarter while missing economists’ consensus estimate of a 10% gain. The figures will be factored into revised GDP figures for the second quarter, which are due for release on Sept. 9.
Monday’s data are in line with earlier indications that the world’s fourth largest economy is continuing on a path of modest recovery. The preliminary GDP figures indicated that the economy rebounded to growth in the three months through June, driven by a pickup in domestic demand, especially private consumption.
Another sign of resilient internal demand offers some vindication for the Bank of Japan’s July 31 decision to raise interest rates and cut bond purchases in a tightening step. Governor Kazuo Ueda said at a parliamentary hearing last month that the move was appropriate as economic data were aligning with forecasts.
In the latest outlook report released in July, the bank said “business fixed investment has been on a moderate increasing trend,” as corporate earnings improve and business confidence remains at a favorable level. 
In the April-June period, 64% of Topix companies beat earnings expectations while 33% missed, a better ratio than the previous quarter, according to Bloomberg-compiled data. Profit growth beat estimates despite weaker-than-expected growth in sales, the data showed.
The government also presented its view that business investment is showing signs of picking up in its August monthly economy report, maintaining the relatively positive view for a sixth month.
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The resilient appetite among businesses partly reflects the need to enhance productivity due to a chronic labor shortage. Japan’s large service sector firms are facing the worst manpower constraints in 32 years, according to the BOJ’s June Tankan report.
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