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Capital Investment Growth Set to be a Lasting Trend
- The Changing Mechanisms of Investment Decision-Making -

July 08, 2005

Overview

Japan's real capital investment has maintained positive year-on-year growth since the fourth quarter of 2002, a period of 30 months. Since the beginning of 2005, however, against a backdrop of a deceleration in exports and a rise in the prices of natural resources, the growth of corporate profits -the "fountain of investment" -has begun to slow.

The characteristics of the current expansion of capital investment, in terms of its relationship to corporate profits and content of investment, can be summarized as follows:

Relationship to Corporate Profits

In the present expansion phase, capital investment has been growing at a gentle pace as compared with the growth of corporate profits. The linkage between capital investment and corporate profits is weakening. As a result, capacity to invest is growing, with balances of financial assets remaining higher than balances of debt.

Content of Investment

1)Investment in information technology is growing at a slow but steady rate.
2)Growth is being led by investment of a highly strategic nature from a medium-to-long term perspective, in areas such as "expanding production infrastructure to enhance competitiveness" and "building nursing and welfare facilities in anticipation of ongoing population aging".

Given these characteristics, it is possible that the channeling of a part of the corporate sector's plentiful stock of money into capital investment will limit the negative impact of the deterioration in corporate profits.

Under these conditions, it is likely that the trends of (i) continual investment in information technology and (ii) fund allocation with an emphasis on strategic investment geared to enhancing non-price competitiveness and moving into promising markets will continue.

As these keynote changes become clearer, the addition of pent-up projects in a number of sectors such as large-scale upgrading of facilities in the electrical power sector makes it likely that capital investment will see fairly strong growth into the second half of fiscal 2005.

From fiscal 2006 onwards, although a backswing following the implementation of large-scale capital investment projects is inevitable, most companies are expected to maintain a stance of steady investment based on a medium-to-long term view, without excessive attention to short-term trends in profit, and it is therefore highly likely that the expansion of capital investment will be a lasting trend, if gently paced.

For more information on the content of this report, please contact: Makoto Ishikawa the Japan Research Institute, Limited.

Tel: 03-3288-4263
E-mail:ishikawa.makoto@jri.co.jp

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