Japan’s economy is showing a robust recovery as consumer spending accelerates, highlighting the need for additional interest rate hikes.
Japan’s economy expanded at a stronger-than-expected 3.1% annual rate in the second quarter, reversing the earlier slump this year with solid consumption growth. This reinforces the need for further rate increases in the near term.
The Bank of Japan anticipates that a sustained recovery will help inflation reach its 2% target, providing further justification for additional rate hikes following the recent efforts to ease years of extensive monetary stimulus.
Gross domestic product (GDP) growth exceeded the 2.1% consensus and an upwardly revised 2.3% for the first quarter, according to data released on Thursday. This brought quarterly growth to 0.8%, surpassing the 0.5% gain predicted in a Reuters poll. Despite the positive data, the Japanese yen demonstrated little movement.
Private consumption, which makes up more than half of economic activity, increased by 1.0%, compared to the 0.5% forecast, marking its first growth in five quarters.
This is particularly significant because consumption has been a weak spot in an economy burdened by rising prices and a declining yen over the past year.
Public frustration over the rising cost of living was one of the factors that led Japan’s Prime Minister Fumio Kishida to announce his resignation next month.
His successor might consider calling a snap election in the fall if their approval ratings stay strong, according to Kengo Tanahashi, an economist at Nomura Securities. He noted that the likelihood of additional rate hikes in October has decreased due to Kishida's decision not to seek re-election.
Yoshitaka Shindo, Japan's Minister of State for Economic and Fiscal Policy, expressed optimism that the economy will continue its gradual recovery, highlighting the success of spring wage negotiations and the planned increase in minimum income set for October.
That being said, Shindo also warned of potential risks, including a slowdown in the global economy and instability in financial markets, particularly as concerns over a potential U.S. recession have already impacted global financial markets.
Last month, the Bank of Japan hiked interest rates and announced plans to scale back its extensive bond purchases, signaling a gradual move away from its massive monetary stimulus.
Japan stands as an exception in a global landscape where most major central banks, including the U.S. Federal Reserve, are either loosening policy or planning to do so. The recent surge in consumption, the first in over a year, is likely to encourage the Bank of Japan to continue raising rates this year.
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