Japan’s economy expanded in the second quarter at a pace slightly slower than the government’s initial estimate, while still advancing enough to keep the Bank of Japan (BOJ) on track to raise interest rates later this year.

Japan’s gross domestic product (GDP) grew at an annualised pace of 2.9% in the three months through June compared to the previous quarter, the Cabinet Office said on Monday. The result compared with a preliminary estimate of 3.1%. Private consumption and capital investment were both revised a tad lower.

In non-inflation adjusted terms, the economy advanced 1.8% from the previous quarter, and the data reaffirmed that the total value of the economy exceeded ¥600 trillion (US$4.2 trillion or RM18.26 trillion) for the first time on record, a goal set a decade ago by policymakers in Japan.

While the key domestic demand components were slightly downgraded, the overall results broadly support BOJ governor Kazuo Ueda’s view that a gradual recovery will continue. Almost no economists expect the central bank to adjust its benchmark rate when the policy board meets later this month, but many BOJ watchers forecast a rate move by January.

Monday’s data confirmed that consumer spending grew 0.9% from the previous quarter in a sign of a recovery after it fell for four consecutive quarters through the end of March.

The revisions were largely within the margin for error, and don’t change the overall perception that the economy was in recovery last quarter, according to Takeshi Minami, the chief economist of Norinchukin Research Institute.

“Today’s data won’t really affect the BOJ’s policy stance,” Minami said. “They are unlikely to raise rates this month given unstable financial markets, but they have made it clear that a rate hike is in their mind, so I think another hike within the year is possible.”

Still, some economists are sceptical about the resilience of consumer demand as households contend with persistent inflation for the first time in a generation. The key gauge of consumer inflation has stayed at or above the BOJ’s 2% target for 28 months, with August data expected to extend that streak. While real wages have finally stopped falling after more than two years, consumer spending has stayed below pre-pandemic levels. 

The rebound in the economy was widely expected by economists after GDP contracted in the first three months of the year. Manufacturing during the period was undermined by a large earthquake northwest of Tokyo on New Year’s Day and disruptions to auto output as a safety certification scandal forced some companies to temporarily shutter factory lines. 

Concerns over cost of living and consumer demand will be on the minds of politicians vying to become Japan’s next prime minister. The ruling Liberal Democratic Party’s (LDP) Sept 27 leadership election is all but certain to determine Prime Minister Fumio Kishida’s successor due to the party’s dominance in Parliament.

Toshimitsu Motegi, currently the LDP secretary general and one of several candidates running in the party race, said last week he will compile an economic package if he wins the vote. Shinjiro Koizumi, one of the front runners in the leadership race, has also pledged to unveil a package should he become the prime minister.

With the likelihood that demand from China and the US may cool as economic growth slows, Japan’s consumer spending will be critical going forward, Minami said.  

“Consumer spending may get stronger as wages are starting to rise,” he said. “At the same time, a recent rise in prices for rice and food may keep households in a saving mode.”

Japan’s economy is expected to continue expanding this quarter, with economists looking for an annualised growth rate of 1.7%, according to the median estimate in a survey by Bloomberg last month. The pace would be well above the 1% that the central bank considers to be the top end of a range for the nation’s potential growth rate. That indicates that economists expect inflationary pressure to persist as the BOJ keeps policy rates at the lowest level among major peers even after two rate hikes earlier this year.  

The central bank will conclude its next policy meeting on Sept 20, with the focus likely to fall on the prospects of another rate increase in October or December after the latest hike to 0.25% in July.

  - Bloomberg