Japan – Q1 profits

Profits declined in Q1 as input prices rose. Non-manufacturing margins, however, remain fairly high, and overall capex growth in Q1 was stable at 3% YoY.

Corporate profits declined in Q1 on the back of a sharp fall in margins in the manufacturing sector. That wasn't particularly surprising, given the rapid increase in input costs through the first few months of 2022.

The same pressures, combined with the pull-back in activity early in the quarter following the increase in Covid-19 cases, resulted in non-manufacturing margins also falling in the first three months. Margins though remain quite high relative to historical levels. Moreover, the April service PMI indicates potential for a rebound in Q2: while input prices are rising, service output prices in May rose by the fastest since 2019, and business activity also picked up.

Corporate investment spending was stable in Q1, rising 3% YoY. That's actually higher than the 20-year average of just 1%, so consistent with a structural improvement in the strength of the economy. However, in absolute terms capex was a bit weaker than the investment figure included in the provisional GDP data for Q1, meaning there is downward risk for the revised national accounts data when they are published next week.