Japanese companies have seen their capital expenditure stall in the first quarter of 2026, with spending on plant and equipment remaining almost flat. This pause comes after a year of strong growth, as concerns about the ongoing conflict in the Middle East weigh heavily on business confidence.

Impact of Middle East Conflict

The conflict in Iran has led to surging energy costs and supply chain disruptions, which analysts say could further undermine investment demand. Despite Japan’s economy growing at a faster-than-expected annualized pace of 2.1% in the first quarter, driven by solid exports and consumption, the momentum is likely to face challenges in the coming months.

According to the Ministry of Finance, first-quarter capital spending rose by a mere 0.047% year-on-year, a significant slowdown from the previous quarter’s 6.5% gain. On a seasonally adjusted quarterly basis, it fell by 2%.

Corporate Sales and Profits

Despite the slowdown in capital expenditure, corporate sales increased by 1.1% in the first quarter compared to the previous year, and recurring profits saw a substantial rise of 14.6%. This indicates that while investment has slowed, companies are still managing to maintain profitability.

Government Initiatives

Prime Minister Sanae Takaichi’s government is actively seeking to bolster business investment through various initiatives. These include offering tax credits for capital investment and increasing public spending in strategic sectors such as semiconductors and shipbuilding. Additionally, the government is revising the corporate governance code to encourage companies to utilize their cash reserves more productively for investment and growth.

Japan aims to double its annual corporate capital expenditure to 200 trillion yen by 2040, a goal that underscores the importance of overcoming current economic challenges.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.