Japan's Economic Surge Boosts Case for More Rate Hikes

Japan's economy saw a robust recovery in the second quarter, expanding at an annualized rate of 3.1%, far surpassing the anticipated 2.1% growth. This rebound followed a revised 2.3% contraction in the first quarter, driven by a strong rise in private consumption, which increased by 1.0%, exceeding the forecasted 0.5% gain. This marks the first rise in private consumption in over a year, bolstered by real wage growth and fixed-rate tax reductions.

The Bank of Japan (BOJ) had anticipated that a steady economic recovery would help achieve its 2% inflation target, a key factor in its recent decision to raise interest rates. This latest economic data supports the likelihood of further rate hikes as the central bank continues its gradual withdrawal from years of extensive monetary stimulus.

Japan’s stock market, however, reacted negatively to these developments, with stocks plunging nearly 6%, the largest drop since the pandemic's onset. The decline was largely attributed to concerns over the yen, which experienced a sharp spike following the BOJ’s previous rate hike.

Despite public discontent over rising living costs, exacerbated by a weaker yen and higher import prices, the government's efforts to stimulate consumption appear to be paying off. Capital spending, another critical component of private demand, rose by 0.9% in the second quarter, aligning with market expectations. Meanwhile, external demand slightly detracted from overall growth, with exports minus imports reducing GDP growth by 0.1 percentage points.