Japan’s Company Profits Fall, Capital Expenditure Remains Weak

(Bloomberg) -- Japan’s capital expenditure data for the second quarter was slightly weaker than expected while company profits slumped as businesses held tight on spending amid a strong yen and sluggish demand at home and abroad.

Key Points

• Capital expenditure rose 3.1 percent from a year earlier (forecast 5.5 percent).

• Spending excluding software increased 3.1 percent over the same period (forecast 5.5 percent).

• Company profits slid 10.0 percent during the second quarter, the biggest drop since 2011.

• Sales declined 3.5 percent in the quarter.

Big Picture

The yen’s resurgence this year has made businesses reluctant to ramp up spending, even after making strong profits in the early years under Prime Minister Shinzo Abe when the currency was moving in their favor. This has complicated Abe’s efforts to revive the economy, and he has exhorted companies to raise wages and increase domestic investment. A pickup in investment, along with an upcoming 28 trillion yen ($272 billion) stimulus package, could provide a boost to domestic demand.

Economist Takeaways

• “Companies are holding off spending as there’s a vague sense of concern over the outlook for the global economy,” said Junko Nishioka, chief economist for Japan at Sumitomo Mitsui Banking Corp.

• “Consumer spending has been sluggish for a while, delivering a body blow to companies,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. “They have to scale back their investment.”

• With corporate profits, “the largest driver for the decline is definitely the exchange rate,” said Takuji Okubo, chief economist at Japan Macro Advisors. He added that domestic demand “deteriorated in the last quarter,” contributing to the drop in non-manufacturing profits.

(Updates with economist comments and adds chart under Big Picture subheadline.)

--With assistance from Keiko Ujikane Yoshiaki Nohara and Maiko Takahashi To contact the reporter on this story: Connor Cislo in Tokyo at ccislo@bloomberg.net. To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Jodi Schneider

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