Japan’s businesses keep investing as economic growth slows

Japanese companies increased capital spending in the second quarter of 2026, signalling resilience in the business sector as economic growth slows and uncertainty remains high across global markets.

Capital expenditure rose 1.6% year on year in the April-June quarter, according to data from Japan’s Ministry of Finance. The figure was significantly stronger than economists had expected, with forecasts pointing to a decline in investment.

The data could support an upward revision to Japan’s second-quarter GDP figures. The preliminary estimate showed the economy grew at an annualised rate of 1.1% in the second quarter, down from 1.9% in the first three months of the year. The slowdown reflected weaker consumer spending and business activity.

Corporate investment remains resilient

The strength of corporate spending stands in contrast to relatively cautious domestic demand. Japanese companies’ sales rose 5.9% year on year in the second quarter, while current profits jumped 24.6%, giving businesses greater room to continue investing in production, equipment and technology.

Technology is becoming an increasingly important driver of investment. Japanese companies are expanding spending on artificial intelligence, semiconductors and advanced manufacturing as competition in strategic technologies intensifies.

Japan’s manufacturing sector also showed signs of renewed momentum in August, with new business rising at its fastest pace since early 2018, driven in part by demand for semiconductors and AI-related products.

For an economy that spent decades struggling with deflation, weak investment and an ageing population, the shift is significant. Companies are now under pressure to address labour shortages while raising productivity and maintaining their position in increasingly competitive technology markets.

Investment puts the Bank of Japan under pressure

Stronger corporate spending adds another argument for the Bank of Japan to continue moving away from its ultra-loose monetary policy.

The central bank is facing conflicting signals. Economic growth is slowing and households remain cautious, but inflation, a weak yen, strong corporate profits and resilient investment suggest that the economy may be able to withstand higher interest rates.

Markets are increasingly focused on the possibility of another rate increase, while the yen has again moved towards the 160-per-dollar level.

At the same time, Japan’s borrowing costs are rising. The yield on the benchmark 10-year Japanese government bond reached 3% on September 1, its highest level since 1996. That leaves the government with less room to combine large-scale fiscal stimulus with extremely loose monetary policy.

Tokyo wants private capital to drive growth

Prime Minister Sanae Takaichi’s government is seeking to make corporate investment a central pillar of Japan’s long-term growth strategy. Artificial intelligence, semiconductors, advanced manufacturing and energy infrastructure are among the areas receiving increasing attention.

That strategy is particularly important because demographic decline limits Japan’s ability to expand the economy simply by increasing its workforce. Productivity gains, automation and investment in technology are therefore becoming essential rather than optional.

The government is also preparing a large budgetary programme. Japanese ministries have requested around 143 trillion yen for the 2027 fiscal year, potentially setting a new record. But rising borrowing costs are making continued reliance on government spending increasingly difficult.

That makes private investment more important. If companies continue directing capital towards technology and productive capacity, Japan could offset weak consumer demand without relying entirely on fiscal stimulus.