Japan’s Economic Growth Slows

By Satoshi Sugiyama
TOKYO (Reuters) – Japan’s economy grew at a slower pace in Q2, affected by declines in corporate and household spending, indicating a challenging second half for consumption and interest rate plans.

The Bank of Japan (BOJ) seeks consistent improvement in domestic demand as it aims to exit its decade-long monetary stimulus and raise interest rates further.

Revised data shows the nation’s GDP expanded by an annualised 2.9% in the April-June quarter, slightly below economists’ forecast of 3.2% and below the preliminary estimate of 3.1%. Quarter-on-quarter, this translates to a 0.7% expansion in price-adjusted terms, revised down from 0.8%.

Kengo Tanahashi, economist at Nomura Securities, noted stagnation since the second half of 2023 despite a rebound in April-June. Capital expenditure rose 0.8%, down from 0.9%, with a private consumption increase of 0.9%, revised from 1.0%.

Analysts predict gradual improvement in Japan’s economy due to rising wages and spending, but external risks from potential slowdowns in the U.S. and China remain. Tanahashi warns of possible weakening in consumption momentum, especially following disappointing July household spending data.

Domestic demand contributed 0.8 percentage points to growth, while external demand subtracted 0.1.

BOJ Policy Challenge

Revised GDP data is unlikely to impact the BOJ’s immediate decisions, but recent spending trends complicate rate-hike paths. The BOJ raised its key interest rate to 0.25% in July, with markets looking for future rate moves.

None of the economists predicted a rate hike in September, but the majority expect tightening by year-end. Tanahashi believes the BOJ will continue normalizing monetary policy unless market turmoil occurs. Other economists also forecast continuous rate hikes, assuming no significant growth or inflation issues arise.

Benjamin Shatil from JPMorgan Securities notes that while inflation has moderated, expectations are for a reversal due to strong wage growth, predicting the next rate hike in December.