FILE PHOTO: Pedestrians walk past an electronic board displaying various companies' share prices, at a business district in Tokyo, Japan, October 31, 2023. REUTERS/Kim Kyung-Hoon/File photo

By Makiko Yamazaki

TOKYO (Reuters) -Japanese companies raised spending on plant and equipment in April-June by 7.6% from the same period a year earlier, Ministry of Finance data showed on Monday, while a large hit from U.S. tariffs on manufacturers' profits clouds the spending outlook.

The healthy rise in capital expenditure signals solid domestic demand underpinning the country's fragile economic recovery, supporting the case for the central bank to raise interest rates again later this year.

But the same data also showed an intensifying impact on profits at manufacturers, particularly automakers, casting a shadow over business investment - a key engine of domestic demand-driven growth.

"Japanese exporters have so far mostly absorbed the U.S. tariff costs by cutting prices. As their profits get increasingly squeezed, they could inevitably turn cautious about investment," said Kazutaka Maeda, economist at Meiji Yasuda Research Institute.

The pace of capital spending in the second quarter accelerated from the previous quarter's 6.4% gain. It grew 1.6% on a seasonally adjusted quarterly basis.

The data will be used to calculate revised gross domestic product figures due on September 8.

Preliminary data last month showed Japan's economy expanded by a faster-than-expected 1.0% on an annualised basis in the second quarter, helped by surprisingly resilient exports and capital expenditure.

Meiji Yasuda's Maeda said the latest capital expenditure data is unlikely to cause a substantial revision to the GDP figures.

Monday's capex data also showed corporate sales rose 0.8% in the second quarter from a year earlier, and recurring profits increased 0.2%.

Among manufacturers, however, recurring profits dived 11.5%, led by a 29.7% plunge in the automobile sector.

Capital expenditure has remained strong in recent years as companies, backed by robust profits, ramp up technology investment to offset a chronic labour crunch.

But economic data released in the past few weeks suggest that U.S. tariffs have started to take a toll on corporate activities in July.

Exports in July logged the biggest monthly drop in about four years due to price cuts by Japanese automakers to absorb tariff costs, while industrial output slumped more than expected due partly to a 6.7% decline in automobile production.

While the Japan-U.S. trade agreement in July is likely to lower U.S. tariffs on Japanese automobiles to 15%, there is uncertainty on when the cut will apply as President Donald Trump has yet to sign an executive order.

(Reporting by Makiko Yamazaki; Editing by Kim Coghill and Lincoln Feast.)