Japan’s economy rebounds on consumption boost, backing case for more rate hikes

TOKYO – Japan’s economy expanded by a much faster than expected 3.1 per cent year on year in the second quarter, rebounding from a slump at the start of 2024, thanks to a strong rise in consumption and backing the case for another near-term interest rate hike.

The Bank of Japan (BOJ) had forecast that a solid economic recovery would help inflation sustainably hit its 2 per cent target, and justify raising interest rates further after it hiked them in July in its continued quest to exit years of massive monetary stimulus.

The increase in gross domestic product compared with a median market forecast for a 2.1 per cent gain, and followed an upwardly revised 2.3 per cent contraction in the first quarter, government data showed on Aug 15.

The reading translates to a quarter-on-quarter rise of 0.8 per cent, beating a 0.5 per cent increase expected by economists in a Reuters poll.

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

“It supports the BOJ’s view and bodes well for further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the yen.”

The yen was trading at 147.39 to the US dollar as at 11.08am Singapore time, versus about 158 in July.

The official data showed that private consumption, which accounts for more than half of the economic output, rose 1 per cent, the first gain in five quarters and compared with a forecast for a 0.5 per cent increase.

Private consumption has been a soft spot in the economy, which has stuttered over the past year as households struggle with rising living costs, blamed in part on higher import prices due to the weak yen.

Public discontent over rising living costs was one of the factors that prompted Japanese Prime Minister Fumio Kishida to announce that he would resign in September.

“Basically, we expect consumption to continue to recover,” said Nomura Securities economist Kengo Tanahashi.

“In addition to the fixed-rate tax reductions in June and subsidies on electricity and gas bills starting in August of this summer, the spring wage talks were strong again this year, and we believe that the increase in income will boost consumption.”

An 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 most recent earnings, lifted by a surge in duty-free sales.

Spending by tourists is expected to reach 8 trillion yen (S$71.5 billion) in 2024, according to the government, which sees tourism as an important growth driver in an economy long hobbled by an ageing population.

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

External demand, or exports minus imports, knocked 0.1 point off growth, the data showed.

The BOJ raised interest rates in July and detailed a plan to taper its huge bond buying in another step towards phasing out its massive monetary stimulus.

Japan is a global outlier in raising rates as most major central banks, including the US Federal Reserve, have begun to ease policy or are moving in that direction.

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