Capex drives Japan's fastest expansion since 2016, seen backing growth

TOKYO (Reuters) - Heavy capital spending in the second quarter drove Japan’s economy to its fastest growth since 2016, underscoring the view that capex continues to back the economy even as trade tensions and a string of natural disasters pose risks to the outlook.

FILE PHOTO - An employee works at a beer production line at a factory in Toride, Ibaraki Prefecture, Japan July 14, 2017. REUTERS/Kim Kyung-Hoon/File Photo - RC12F7A8B610

Revised Cabinet office data out on Monday showed the economy grew an annualized 3.0 percent in April-June, handily beating economists’ median estimate for 2.6 percent gain and the initial estimate of a 1.9 percent expansion.

It was the fastest expansion since first-quarter 2016.

The economy’s improved performance should be a relief for policymakers worried over fallout from a trade war between the United States and China, which could derail global growth and in turn damage Japan’s export-reliant economy.

Capital expenditure has been a bright spot in Japan’s economy, the world’s third largest, although companies remain cautious about sharing more of their profits with workers, keeping a lid on private consumption and inflation.

“The environment surrounding capex is favorable thanks to labor-saving investment because of labor shortages, construction demand related to the 2020 Tokyo Olympics and inbound tourism, and research and development, on top of hefty company profits,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“The Bank of Japan’s tankan survey has indicated there’s a strong appetite for business investment. As such, capex is likely to remain in an uptrend to underpin the economy ahead.”

The updated second-quarter growth showed quarter-on-quarter expansion of 0.7 percent in real, price-adjusted terms, compared with an initial reading of a 0.5 percent growth and the median estimate for a 0.7 percent gain.


The capital expenditure component of GDP grew 3.1 percent in April-June from the previous quarter, versus the median forecast for 2.8 percent growth, and the preliminary 1.3 percent gain.

That was the fastest increase since the start of 2015, driven by transport and postal services, and electrical and chemical industries.

The upbeat GDP data followed a finance ministry survey that last week showed corporate capex rose at the fastest pace in 11 years in the second quarter, driven by procurement of production equipment for cars and semiconductors.

Still, a recent run of soft data such as exports and factory output, has cast doubt on the robustness of recent growth.

A series of disasters including floods, last week’s typhoon and an earthquake, prompted some analysts to forecast a contraction in the current quarter.

“Japan’s exports and factory output are set to slow in July-September as supply and shipments are constrained due to natural disasters and inbound tourism slumps,” said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities.

“Japan’s economy may suffer a temporary contraction in this quarter.”

Private consumption, which accounts for roughly 60 percent of GDP, grew 0.7 percent in April-June from the previous three months, unchanged from the preliminary estimate.

Domestic demand contributed 0.9 percentage points to revised GDP, while net exports - or exports minus imports - shaved 0.1 percentage point off the second quarter growth.

Reporting by Tetsushi Kajimoto; Editing by Eric Meijer