(Aug 15): Japan’s economy rebounded to growth in the second quarter on the back of an increase in private consumption, in a sign that a virtuous cycle long sought by the central bank linking rising incomes to increased spending may be starting to emerge.

Gross domestic product expanded at an annualised pace of 3.1% in the three months through June versus the prior period, the Cabinet Office reported on Thursday. The reading, which exceeded the 2.3% consensus estimate, came after the economy contracted by a revised 2.3% in the first quarter.

Thursday’s data indicated that a long awaited recovery in personal spending may finally be underway after large companies agreed to offer the biggest wage increases in more than three decades and the government implemented a tax rebate. Until the latest period, consumption had fallen in every quarter for a year.

“Consumption is gradually recovering, and I think it will be sustainable to some extent,” said Takeshi Minami, an economist at Norinchukin Research Institute. “I believe that companies will increase domestic capital investment too.”

Thursday’s figures will be welcome news for the Bank of Japan (BOJ), which has been looking for evidence that wage gains will spur personal spending and generate stable demand-led inflation. Last month, the BOJ raised its benchmark interest rate for a second time this year, and unveiled a plan to halve monthly bond purchases by the first quarter of 2026 as it continues to normalise policy after years of unprecedented easing.

BOJ governor Kazuo Ueda said after that meeting the board would continue hiking rates if economic data were in line with the bank’s forecasts, remarks that some blamed for fanning concerns that fuelled the recent market turmoil. Ueda is scheduled to appear before Parliament next week to explain the latest decision and share his policy outlook.

“The BOJ has been conveying concerns about the markets, but its true intention is to raise interest rates,” said Minami. “I think this stance has not changed at all, and it will raise rates when conditions allow it to do so.”

The data create a supportive background for the government just as the ruling Liberal Democratic Party (LDP) prepares to select a new prime minister. Fumio Kishida said on Wednesday he won’t run in a party leadership election next month, opening the way for the LDP to name a replacement. The new prime minister will have the option of calling a general election to firm up his mandate after support for Kishida sagged consistently due to voter frustration over rising costs of living and a political funding scandal.

The second-quarter data showed that the negative impacts from one-off factors including production halts at some automakers and a New Year’s Day earthquake may have finally run their course, helping to support consumption.

Private spending is expected to gain momentum, with recent wage growth likely to buoy consumer sentiment. Japanese workers’ real wages rose for the first time in over two years in June, reflecting solid salary gains from this year’s pay negotiations. Kishida’s tax rebate initiative was implemented in June, also likely supporting spending.

Thursday’s report also reflected a solid foundation for businesses’ capital spending, which slightly exceeded estimates with a 0.9% gain in the period. The BOJ’s Tankan report earlier showed that companies planned to boost investment for this fiscal year by 11%.

The recent strengthening of the yen may soothe shoppers’ concerns about price hikes. Rising import costs have been a factor helping to keep consumer inflation at or above the BOJ’s 2% target for 27 months.

“The government must continue to provide financial support for people’s lives until inflation is firmly under control to stem the decline in purchasing power,” said Junichi Makino, the chief economist of SMBC Nikko Securities.

Japan’s currency has recently gained amid expectations the US-Japan interest rate gap is set to narrow as the Federal Reserve (Fed) responds to slowing US growth and cooling inflation by cutting interest rates as soon as next month. The yen was trading around 147.20 to the dollar on Thursday morning in Tokyo, versus about 158 a month ago.

Whether the Fed manages to achieve a soft landing for the US economy will be of critical importance to Japan’s exporters. The International Monetary Fund warned in its latest economic outlook that inflation in many major economies has been cooling slower than expected, raising a potential risk to global growth from interest rates staying higher “for even longer”.

Japan’s exports have increased for seven months through June, supported in part by demand for chip-making gear. Even so, net exports trimmed growth by 0.1 percentage point in the period due in part to rising imports.

Japan continues to benefit from inbound tourism. A record 17.8 million foreign visitors came to Japan in the first half of the year, according to the Japan National Tourism Organization last month. The Tourism Agency separately reported that these tourists spent ¥2.1 trillion (US$14.3 billion or RM63.09 billion) in the quarter from April to June, up about 70% from the same period in 2019, before the Covid-19 pandemic crippled the tourism industry.

Uploaded by Tham Yek Lee