Strong increase in Q2 Japanese capital expenditures, consequences of tariffs negatively impacting manufacturers' earnings clouding future prospects

In the past few weeks, the Japanese economy has experienced a series of changes due to the ongoing trade negotiations between Japan and the United States.

According to recent reports, the Japan-U.S. trade agreement in July is expected to lower U.S. tariffs on Japanese automobiles to 15%. However, there is uncertainty about when the reduction will take effect as President Donald Trump has not yet signed an executive order.

This uncertainty has led to price cuts by Japanese automakers to absorb tariff costs, resulting in a significant monthly drop in exports in July – the biggest drop in about four years. The economic data suggests that these tariffs are negatively impacting corporate activities, particularly in the automobile sector.

As a result, manufacturers, particularly automakers, are experiencing a negative impact on their profits. In the second quarter, recurring profits decreased by 11.5%, with the automobile sector experiencing a 29.7% plunge. Economist Kazutaka Maeda stated that Japanese exporters, under increased profit pressure from U.S. tariffs, may become more cautious about investment.

On a positive note, corporate sales increased by 0.8% in the second quarter compared to the same period the previous year, and capital expenditure has remained strong. Japanese companies increased their spending on plant and equipment by 7.6% in the April-June period compared to the same period in the previous year. The rise in capital expenditure is a sign of solid domestic demand supporting Japan's economic recovery.

Capital expenditure has remained strong in recent years due to companies investing in technology to address a labour shortage. The pace of capital spending in the second quarter accelerated from the previous quarter, with a 1.6% growth on a seasonally adjusted quarterly basis.

Preliminary data showed Japan's economy expanded by 1.0% on an annualized basis in the second quarter, thanks to surprisingly resilient exports and capital expenditure. However, economist Meiji Yasuda's Maeda expressed doubt that the latest capital expenditure data would significantly revise the GDP figures.

The intensifying impact on manufacturers' profits could potentially affect business investment. As the situation unfolds, it is essential to monitor the latest information on the status of tariff negotiations between Japan and the United States regarding the 15 percent tariffs on automobile imports. The latest information can be found in recent trade reports or official statements from both countries' trade ministries or the U.S. Trade Representative's office.

The data will be used to calculate revised gross domestic product figures due on September 8. The impact of U.S. tariffs on Japanese automobiles and the Japanese economy continues to be a critical topic for both countries, and the outcome of the negotiations will have significant implications for the future of the Japanese economy.