Q2 GDP: Japan’s economy rebounds, bolstering case for more rate hikes

Japan’s economy grew at a much faster-than-expected 3.1% annual rate in the second quarter, recovering from a recession at the start of the year on a strong rise in consumption and supporting the case for another interest rate hike in the near term.

The Bank of Japan had expected a strong economic recovery to help inflation reach its 2% target sustainably, justifying another interest rate hike after it raised them last month in its ongoing push to exit years of massive monetary stimulus.

The increase in gross domestic product compared with a median market forecast for a 2.1% increase, government data showed on Thursday, and came after an upwardly revised 2.3% contraction in the first quarter.

The reading translates to a quarterly gain of 0.8%, beating the 0.5% increase forecast by economists in a Reuters poll.

“The results are simply positive overall, with signs of a recovery in private consumption supported by real wage growth,” said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

“This supports the Bank of Japan’s view and bodes well for further rate hikes, although the central bank will remain cautious as the recent rate hikes have caused a sharp rise in the yen’s value.”

Private consumption, which accounts for more than half of economic output, rose 1.0%, compared with expectations for a 0.5% increase and the first gain in five quarters.

Private consumption has been a weak spot in the economy, which has faltered over the past year as households struggle with rising living costs, partly due to higher import prices caused by a weaker yen.

Public discontent with the rising cost of living was one of the factors that prompted Japanese Prime Minister Fumio Kishida to announce his intention to resign next month.

“Basically, we expect the recovery in consumption to continue,” said Kengo Tanahashi, an economist at Nomura Securities.

“In addition to flat-rate tax cuts starting in June and support for electricity and gas bills starting in August of this summer, spring wage talks have been strong again this year, and we believe the increase in incomes should boost consumption.”

The influx of tourism has also helped boost retail sales in Japan. Fast Retailing, owner of clothing brand Uniqlo, highlighted the strength of the domestic market in its latest earnings, helped by higher sales of duty-free goods.

Tourist spending is expected to reach 8 trillion yen ($54.74 billion) this year, according to the government, which sees tourism as an important growth engine in an economy long plagued by an aging population.

Capital spending, a key driver of private demand-led growth, rose 0.9% in the second quarter, matching the median market forecast in a Reuters poll.

External demand, or exports minus imports, reduced growth by 0.1 percentage point, the data showed.

The Bank of Japan raised interest rates last month and announced a plan to scale back its massive bond purchases in another step toward phasing out massive monetary stimulus.

Japan is an outlier in the world in raising interest rates, as most major central banks, including the US Federal Reserve, have begun to ease monetary policy or move in that direction.

The first rise in consumption in more than a year “should encourage the Bank of Japan to push ahead with another rate hike later this year,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.