Japan Q2 Growth Misses Forecasts, Complicating BOJ’s September Rate-Hike Outlook

Japan’s second-quarter economic growth missed market forecasts, complicating the Bank of Japan’s timing for another interest-rate increase.

Bloomberg reported on Aug. 16 that Japan’s Cabinet Office said real gross domestic product rose an annualized 1.1% in the second quarter from the previous quarter. That was slower than the revised 1.9% growth rate in the first quarter and below the 2.0% expected by economists. Even so, the economy expanded for a third straight quarter.

Weak domestic demand contributed to the slowdown. Capital expenditure fell 1.2% from the previous quarter as uncertainty stemming from the Middle East conflict weighed on corporate investment sentiment. That was a sharper drop than the 1.0% decline in the prior quarter and far short of market expectations for a 0.5% increase.

Private consumption was unchanged from the previous quarter. Economists had forecast a 0.4% increase, but higher living costs, including energy prices, appear to have constrained household spending.

The weaker-than-expected growth data has somewhat weakened the case for a BOJ rate increase. With both consumption and capital spending soft, the central bank may have to lean more heavily on inflation pressure driven by yen weakness, rather than economic resilience, to justify a move next month.

Price pressure in Japan remains elevated. Corporate prices rose 7.2% in July from a year earlier. Higher energy costs linked to the Middle East conflict, combined with the weaker yen, have continued to raise companies’ cost burdens.

Even so, markets are still leaning toward a September rate increase. Overnight swaps imply about an 80% chance that the BOJ will raise rates on Sept. 18.

The yen’s weakness is also adding to the case for tighter policy. Although the US and Japan jointly intervened in the foreign-exchange market in July, the yen has since slid back to around 159 per dollar, giving up much of its earlier gain.

Bloomberg Economics said second-quarter GDP exceeded Japan’s potential growth rate, but the details weakened the case for a BOJ rate increase in September. The decline in capital spending, it added, may signal that companies are becoming more cautious about the economic outlook.

Naoki Hattori, chief economist at Mizuho Research & Technologies, said a September rate increase remains the base-case scenario even after the latest data. He added that the external backdrop has also increased pressure on the BOJ to raise rates following the joint US-Japan foreign-exchange intervention in July.