Japanese companies are increasing their spending on new capital assets, leading to more promising growth for the nation’s economy.
In the January-March quarter, Japan’s GDP rose by an annualized 3.9%. This is the highest seen since 2014, mostly caused by active investments from Japanese companies.
Companies are starting to increase their domestic spending. Indeed, it rose from 0.4% to 2.7% from preliminary data. Furthermore, the average age of Japanese companies’ domestic facilities rose from 10 to 15 years between 1995 and now.
Preliminary data undervalued capital spending figures by a considerable amount. A large number of these figures had to be adjusted higher.
The numbers that were estimated in May 20 showed that Q1 would mark the first increase in four quarters, when it reality, revised data showed that this quarter was the third straight quarter of growth in corporate expenditures. Overall, revised data was changed from a 0.5% decrease to a 0.4% increase.
Japanese Capital Spending Leaps Forward
Over the past few years, Japanese businesses had no incentives to renew their facilities. With contracting domestic demand, an aging population, and a long economic slump, businesses shied away from renovation.
But with growing profits and a sustained weak yen (which has been one of Asia’s worst performing currencies), more companies find an advantage in replacing their facilities.
This recovery can be best illustrated by the electronics industry, which is coming out of a restructuring period. Panasonic’s president Kazuhiro Tsuga said investment in domestic facilities will be the number one priority for this year.
Panasonic plans to increase its capital spending both in Japan and abroad to 285 billion yen ($2.25 billion). This represents an increase of 25%.
Toyota Motor is another example. It’s looking to boost their global investment by 1.2% to 1.2 trillion yen. The global automaker plans to invest in both new assembly plants abroad and in existing domestic plants.
This capital spending boom has spilled over to industries other than the manufacturing sector. Mitsubishi Estate plans to increase their investment by 81% to 320 billion yen this fiscal year. The company wants to redevelop its domestic properties in Tokyo.
Statistics from the finance ministry show that capital spending should outpace depreciation costs. Firms are starting to spend their cash accumulated during the deflation years, breaking their old habit of making minimal investments.
Is Growth of Japanese Economy Enough?
However, it must be asked: is this capital spending boom enough to drive the Japanese economy? The answer to this is less clear. A leading indicator showed machinery orders for April-June are projected to decline by 7.4% on quarter.
Furthermore, the Economy Watchers Survey for May shows signs of unsteady economic conditions. According to the survey, the economic sentiment index is set to decline 0.3 points to 53.3. This is due to concerns about material prices rising against a weak yen.
There is a clear trend of companies investing with their abundant cash. Yet it remains to be seen whether this will have a significant impact on the Japanese economy. Growth prospects for other countries in Asia are still brighter and more certain.
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