Japanese companies demonstrated an increase in capital spending in Q1 2025 despite the rise in tariffs from the US, indicating strong domestic demand and business confidence.
Increase in Capital Spending and Corporate Profits
According to Japan's Ministry of Finance, capital spending, excluding software, rose by 6.4% year-on-year. This figure surpassed the expected 3.8% increase and marked a significant recovery from a 0.2% decline in the previous quarter. When including the more volatile software category, total capital investment rose, indicating broad-based investment growth. Corporate sales also grew by 4.3%, and profits increased by 3.8%.
Exporters Concerned Over US Tariffs
Despite robust domestic investment, Japanese exporters are facing growing uncertainty due to the intensifying US tariff policy. These tariffs may go into effect in July without progress in trade negotiations between the two nations. The steel and automotive sectors are particularly concerned, as they make up a significant portion of Japan's exports to the US. Prime Minister Shigeru Ishiba is considering a trip to Washington for high-level talks to address trade tensions.
Government Measures to Encourage Investment
The Japanese government is actively promoting increased capital spending as a foundation for growth and industrial stability. A panel of experts assembled by the Ministry of Economy, Trade, and Industry has urged businesses to focus on additional 'corporate funding' beyond necessary investments in plants and equipment. The Bank of Japan is also optimistic about future investment growth, particularly in innovation-heavy sectors like digitalization and decarbonization. These initiatives aim to bolster Japan's economy in the face of external pressures.
The situation in the Japanese economy remains strong despite pressures from US tariffs. Government and diplomatic efforts are aimed at mitigating impacts and supporting domestic investments.
