Data released on Monday revealed that Japanese corporate annual investment in plant and equipment was largely unchanged in the first quarter, marking a standstill following a year of robust growth, as market concerns over the impact of conflicts in the Middle East intensified. This weak spending data will be incorporated into the revised Gross Domestic Product (GDP) figures scheduled for release on June 8. Analysts indicated that surging energy costs and supply chain disruptions stemming from the Iran conflict could further dampen investment demand. Preliminary data from last month showed that Japan's economy grew at an annualized rate of 2.1% in the first quarter of 2026, supported by steady exports and consumption, exceeding expectations. However, growth momentum for the current quarter is likely to face significant challenges. According to data from Japan's Ministry of Finance, capital expenditure in the first quarter increased by 0.047% year-on-year, a sharp deceleration from the 6.5% growth recorded in the previous quarter. On a seasonally adjusted basis, it declined by 2% quarter-on-quarter. A government official noted that growth momentum has weakened following strong investment in artificial intelligence-related sectors in recent quarters. The capital expenditure data released on Monday also showed that corporate sales in the first quarter rose by 1.1% year-on-year, while recurring profits increased by 14.6%. Capital expenditure is a key indicator of domestically driven economic growth. In recent years, strong corporate investment intentions, driven by the need to address chronic labor shortages resulting from rapid population aging, have supported robust corporate spending. Japan's process of emerging from deflation has also prompted a shift in corporate behavior, with companies finally deploying their substantial long-held cash reserves for business expansion and investment. The government of Prime Minister Takaichi Sanae is accelerating this transformation by offering tax credits for capital investment and increasing public expenditure in strategic sectors such as semiconductors and shipbuilding. Japan is also revising its corporate governance code, urging companies to evaluate whether their cash reserves are being effectively utilized for investment and growth rather than remaining idle on balance sheets. Japan aims to double annual corporate capital expenditure to 200 trillion yen by 2040.
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