Japan’s Revised GDP Growth Slows, But BOJ Rate Hike Still on the Table

Introduction 

Japan’s economic expansion in the second quarter of 2024 has been revised downward, signaling a slower pace of growth than initially estimated. However, the economy's overall strength continues to suggest that the Bank of Japan (BOJ) may still consider raising interest rates later this year.

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GDP Growth Revised Down to 2.9%

According to the Cabinet Office, Japan's gross domestic product (GDP) grew at an annualized rate of 2.9% from April to June 2024. This is slightly below the preliminary estimate of 3.1%. Despite the slight reduction, the figure still reflects a significant recovery, driven by resilient consumer spending and capital investment.In real terms, Japan’s economy grew 1.8% quarter-on-quarter, reaffirming that the total value of the economy surpassed ¥600 trillion ($4.2 trillion) for the first time in history.

Consumption and Investment Adjusted Lower

The revision came as private consumption and capital investment, key pillars of domestic demand, were both adjusted downward. Consumer spending increased by 0.9%, marking a recovery from a period of four consecutive quarters of decline that ended in March. While these components showed weaker performance than initially expected, their overall contribution still reflects a positive economic trend.

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Inflationary Pressures and BOJ's Outlook

Persistent inflation continues to challenge Japan’s households. Consumer inflation has remained above the BOJ's 2% target for 28 consecutive months, and August data is expected to continue this trend. Although real wages have stabilized after more than two years of decline, consumer demand remains below pre-pandemic levels.

Political Considerations Amid Economic Uncertainty

The cost of living and consumer demand will likely shape Japan’s political landscape, especially as the ruling Liberal Democratic Party (LDP) prepares for its leadership election on September 27, 2024. The outcome of this race is expected to determine Japan’s next prime minister, with economic policies at the forefront of the debate.

Economic Outlook for Q3 2024

Looking ahead, economists surveyed by Bloomberg forecast an annualized growth rate of 1.7% for the third quarter of 2024. While this projection suggests a slowdown from the previous quarter, it remains above the BOJ’s top-end potential growth estimate of 1%. This indicates that inflationary pressures will likely persist, keeping monetary policy tightening in play.

Conclusion

Japan’s second-quarter growth, though slightly weaker than initially reported, is robust enough to support the BOJ’s potential rate hikes later this year. With inflationary pressures still present, the bank faces a complex challenge in managing both economic recovery and price stability. The political landscape will also be closely watched as Japan navigates its post-pandemic recovery.

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