Recent statistical data reveals a significant uptick in Japan's corporate investments during the three-month period ending in September. This surge indicates a stronger-than-expected performance in business investment from the previous quarter and highlights an unexpected resilience in corporate confidence, supporting the increasingly hawkish perspective within the markets that the Bank of Japan (BoJ) may soon announce another rate hike. Kazuo Ueda, the governor of the Bank of Japan, has recently indicated that discussions are underway concerning the timing of potential interest rate hikes, with a particular focus on wage levels and other inflation-related areas being paramount in the decision-making process.
According to a report from Japan's Ministry of Finance released on Monday, corporate capital expenditure on goods, excluding software, increased by 0.8% in the third calendar quarter, with manufacturers leading this growth. In stark contrast, preliminary data for Gross Domestic Product (GDP) announced last month indicated a decrease of 0.2% in corporate spending for the same period.
This persistent corporate confidence is notably underscored by a higher-than-expected increase in capital expenditures in the third quarter, with corporate spending excluding software showing a year-on-year growth of 9.5%, surpassing market expectations, while total expenditures including software rose by 8.1% year-on-year.
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The implications of these findings will be incorporated into the revised quarterly GDP data that is set to be released on December 9. Preliminary figures indicate that over the three-month period ending in September, the annualized quarter-on-quarter GDP growth stood at 0.9%. This figure, though reflecting a slowdown from the previous quarter, still slightly exceeds general market expectations.
Adding to the momentum for the Bank of Japan's potential rate hike in December is the recent economic data showing an acceleration in inflation rates in Tokyo, surpassing expectations. This robust inflation backdrop complements the resilience observed in Japan's GDP, bolstering the likelihood of a monetary tightening from the central bank next month. Inflation data from Tokyo is widely regarded as an early indicator of national trends in Japan's inflation.
A report released by Japan's Ministry of Internal Affairs last Friday indicated that the core consumer price index (CPI) for Tokyo experienced a year-on-year increase of 2.2% in November, up from 1.8% in the previous month and significantly higher than the economists' forecast of 2%. The overall inflation rate also rose to 2.6% due to surging food prices, prompting a notable appreciation of the yen against the dollar following the data publication.
Chief Economist Shinichiro Kobayashi from Mitsubishi UFJ Research and Consulting expressed, “Considering the recent pricing data, I believe the Bank of Japan will have the opportunity to raise rates again in December. They are unlikely to wait until next year, as inflation driven by government tariffs and other policies, alongside trade risks, is expected to rise.”
The preliminary GDP data reinforces the notion that private consumption is a critical driving force behind Japan’s economic growth in the third calendar quarter. The domestic economy signals robust health characterized by sustained inflation, leading to speculation that the Bank of Japan may opt to adjust its benchmark interest rate at the conclusion of its next Monetary Policy Committee meeting on December 19.
In a recent interview, Governor Ueda stated that the trajectory of inflation rates and economic trends aligns closely with the Bank's forecasts, suggesting that the next rate hike could occur “not long from now.”
The economic outlook report published by the Bank of Japan in October noted, “With the improvement in corporate profits and a sustained positive business investment sentiment, corporate fixed investment has been on a moderate growth trend.”
Additional government data released on Monday indicated that the investment scale among manufacturers in Japan, excluding software, rose by 3.7% from the previous quarter, while investment in service industries witnessed a decline of 0.7%. The overall business investment in the third quarter surpassed expectations, highlighting significant strengths in Japan’s manufacturing sector.
Even though corporate profit growth experienced its largest decline since the first quarter of 2022, overall corporate spending continues to rise. The Ministry of Finance attributes this paradox to increased research and development expenditures among automobile manufacturers and heightened competition faced by Japanese firms in overseas markets, which consequently affected profit margins. Additionally, the energy sector has been adversely impacted by persistently declining international oil prices.
Economist Kobayashi remarked, “The substantial drop in profits among manufacturers certainly comes as a surprise; however, in general, corporate capital expenditures in Japan remain robust.”