Japan’s economy grew faster than initially estimated during the second quarter, adding to expectations that the Bank of Japan could raise interest rates later this month.
The stronger GDP figures suggest that Japan’s economic recovery maintained momentum despite weakness in household spending and business investment.
Japan Q2 GDP Growth Revised Higher
Japan’s gross domestic product expanded at an annualised rate of 1.4% between April and June, according to Cabinet Office data released on Tuesday.
The result exceeded economists’ forecast of 1.1%.
It was also higher than the government’s initial estimate of 1.1%, although growth slowed from the 1.8% annualised expansion recorded during the first quarter.
On a quarter-on-quarter basis, Japan’s GDP increased 0.4%.
That was stronger than the 0.3% forecast but below the 0.5% growth reported in the previous quarter.
External Demand Supports Japan’s Economy
External demand played an important role in supporting economic growth during the second quarter.
It increased 0.5% from the previous quarter, accelerating from growth of 0.3% during the first three months of the year.
The improvement helped offset softer activity in other parts of the Japanese economy.
Strong external demand remains particularly important as policymakers attempt to generate more sustainable domestic growth.
Consumer Spending Remains Weak
Private consumption was unchanged during the second quarter, matching economists’ expectations.
That followed a 0.3% increase in the previous quarter.
The flat reading suggests that Japanese households remain cautious about spending despite signs of stronger wage growth.
Consumer demand is closely watched by the Bank of Japan because stronger wages and spending could support inflation and make further monetary tightening easier to justify.
Business Investment Declines
Capital expenditure fell 0.9% during the quarter.
Although this represented a decline, the result was slightly better than forecasts for a 1.2% drop.
Weak business investment remains one of the softer areas of Japan’s economy.
However, the smaller-than-expected decline helped contribute to the upward revision in overall GDP growth.
Japan’s Real Wages Rise Sharply
Japan also received encouraging news from the labour market.
Real wages increased 2.4% year-on-year in July, marking their strongest rise since May 2021.
Higher real wages can improve household purchasing power and potentially support consumer spending over the coming months.
Sustained wage growth is also an important factor for the Bank of Japan as it evaluates whether inflation can remain stable over the longer term.
BOJ Rate Hike Expectations Increase
The stronger GDP figures have reinforced expectations that the Bank of Japan may raise its policy rate by 25 basis points later this month.
Investors have increasingly positioned for tighter Japanese monetary policy as economic data improve.
A stronger economy gives the BOJ more flexibility to continue moving away from the ultra-low interest-rate policies that dominated Japan for many years.
Japanese Yen Strengthens Against the Dollar
Expectations of higher Japanese interest rates have also supported the yen.
The currency recently climbed to a seven-month high against the US dollar as investors increased bets on further Bank of Japan tightening.
The USD/JPY pair fell around 0.6% to 153.38 by 04:07 GMT.
A lower USD/JPY exchange rate indicates that the yen is strengthening against the dollar.
Japan Economic Outlook Remains in Focus
Japan’s upgraded second-quarter GDP figures provide further evidence that the economy continues to expand.
Stronger external demand and improving real wages are positive developments. However, weak consumer spending and declining business investment remain important challenges.
Investors will now focus closely on the Bank of Japan’s upcoming policy decision.
If economic momentum continues and wage growth remains strong, policymakers could have a stronger case for further interest-rate increases.
