Japan's capital expenditure stays weak in Q2, company profits fall

A man walks past a factory at the Keihin industrial zone in Kawasaki, south of Tokyo, Japan on Aug 18, 2016.
A man walks past a factory at the Keihin industrial zone in Kawasaki, south of Tokyo, Japan on Aug 18, 2016.PHOTO: REUTERS

TOKYO (BLOOMBERG) - Japan's capital expenditure data for the second quarter was slightly weaker than expected while profits dropped as businesses held tight on spending amid a strong yen and sluggish demand at home and abroad.

Capital expenditure rose 3.1 per cent from a year earlier versus the 5.5 per cent forecast by economiss.

Company profits slumped 10.0 per cent during the second quarter whie sales slid 3.5 per cent.

The yen's resurgence this year has made business reluctant to ramp up spending, even after making strong profits in the early years under Prime Minister Shinzo Abe when the currency was moving in their favor. This has complicated Abe's efforts to rev up the economy, and he has exhorted companies to raise wages and increase domestic investment. A pickup in investment, along with an upcoming 28 trillion yen (S$369.7 billion) stimulus package, could provide a boost to domestic demand.

Many large Japanese manufacturers are exporters, said Betty Rui Wang, northeast Asia economist at Standard Chartered Bank in Hong Kong, "so I would think that the impact of the stronger yen on the export side would be relatively strong."

Volatility in currency markets makes it "very hard for companies to manage their hedging strategies," negatively affecting business sentiment, she said, before the data were released.

"Corporations are still not convinced that consumption is coming back," Ms Wang said, meaning companies are hesitant to invest at home.