Japan's Q2 capex Surges strongly, Signals Solid Domestic Demand

In the second quarter, there was a quicker increase in Japanese corporate investment in plant and equipment, which suggests a potential domestic-led economic recovery and reinforces the argument for additional interest rate hikes in the near future.

The firm spending information, which will be utilized to determine updated gross domestic product (GDP) numbers set to be released on Sept. 9, builds on a recent factory poll indicating a lesser decline in manufacturing operations in the previous month.

Data from the Ministry of Finance showed that there was a 7.4 per cent increase in capital spending in the April-June quarter compared to the previous quarter's 6.8 per cent rise. It increased by 1.2 per cent in a seasonally adjusted quarter-on-quarter comparison. Capital expenditure is considered a crucial indicator of economic growth driven by domestic demand, with policymakers relying on business investments to drive the world's fourth largest economy as exports face challenges due to uncertainties in the U.S. and Chinese economies.

Initial data in the previous month indicated that Japan's economy experienced a significant recovery in the second quarter after a downturn in the beginning of the year, driven by a substantial increase in consumption. When considering all factors, the favorable economic boost justifies the argument for the central bank to increase interest rates in the upcoming months, despite the setback from the export industry.

"Capital expenditure has been solid overall thanks to brisk appetite for digital-related investment, although spending by manufacturers was not that strong," Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.