(Bloomberg) -- Japanese businesses boosted investment in the second quarter of the year, reaffirming signs of confidence that the economy is recovering slowly with the help of an uptick in domestic demand-led activity.
Capital expenditure 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 gauge 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 due for release on Sept. 9. Economists will parse the combination of stronger and weaker than expected results as they try to determine how economic growth figures might be revised.
Overall, Monday’s data are in line with earlier indications that the world’s fourth largest economy continues on a path of mild 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.
Monday’s data may result in a downward revision to capex, according to Naoki Hattori, senior economist at Mizuho Research & Technologies.
“Business spending growth in the April-June quarter will remain positive quarter on quarter, but it will likely be revised slightly downward from the preliminary 2Q GDP figure,” Hattori said.
Taro Saito, head of economic research at NLI Research Institute, sees a revision in the opposite direction. “Business spending will likely be revised slightly upward, but it won’t be a big revision,” he said.
A closer look at the figures pointed to stronger investment in the more domestic oriented service sector. On a quarter-on-quarter basis, manufacturing investment fell 3.3% compared with a 4.9% gain for services.
“The non-manufacturing sector, especially the service sector, is the main driver of the increase,” said Hattori. “Inbound demand is quite strong, and investment in lodging and food and beverage have driven growth.”
The fresh sign of resilient internal demand offers support for the Bank of Japan’s July 31 decision to raise interest rates and cut bond purchases in a policy 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.
Read: Japan Raises View of Economy for First Time in 15 Months
Businesses are expected to continue boosting investment in an effort to cope with a chronic labor shortage, according to Hattori. Japan’s large service sector firms are facing the worst manpower constraints in 32 years, according to the BOJ’s June Tankan report.
Atsushi Takeda, chief economist at Itochu Research Institute, said that while the data may result in a downward revision to capital spending in next week’s revised GDP, he sees Japan’s economy heading for a recovery in the third quarter, which may keep the BOJ on track for a rate hike in December.
The government is also intensifying calls for more investment in decarbonization efforts. Japan’s economy ministry requested ¥1.25 trillion to fund efforts to reduce carbon emissions for the year beginning April, a nearly 30% increase from the previous year.
The ruling Liberal Democratic Party is paying close attention to economic trends, as it heads into a leadership contest later this month. A snap general election may follow soon after a new prime minister is chosen to replace Fumio Kishida. So far more than 10 names have been floated as potential candidates.
(Updates with economists’ comments)
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