Japan's economy experienced a robust rebound in the second quarter of 2024, bolstered by a significant surge in private consumption and adding weight to the argument for further interest rate hikes. The country's Gross Domestic Product (GDP) expanded by an annualized 3.1% during the quarter, surpassing economists' expectations of a 2.1% increase. This marks a sharp recovery from the 2.3% contraction seen in the first quarter, signaling a stronger-than-anticipated resurgence in economic activity.
On a quarterly basis, Japan's GDP grew by 0.8%, outpacing the 0.5% rise predicted in a Reuters poll. This positive economic performance is largely attributed to a 1.0% increase in private consumption, which had been a weak spot in the economy, particularly as households struggled with rising living costs exacerbated by higher import prices due to the weak yen.
Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, commented on the results, noting, "The results are simply positive overall, with signs for a pick-up in private consumption backed by real wage growth. It supports the BOJ's view and bodes well for further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the yen."
The Bank of Japan (BOJ) had already taken steps to raise interest rates last month, with the latest GDP figures likely reinforcing its position. The central bank has been gradually moving away from its years of aggressive monetary stimulus, aiming to achieve a sustainable 2% inflation target. The recent data provides further justification for continuing this trajectory, although the BOJ is expected to proceed with caution.
Despite the overall positive outlook, some challenges persist. The public discontent over rising living costs was one of the factors that led to Prime Minister Fumio Kishida's announcement of his resignation. This political uncertainty adds a layer of complexity to the economic landscape, with economists like Kengo Tanahashi from Nomura Securities suggesting that the BOJ might delay further rate hikes until after a new prime minister is in place.
"We believe that the BOJ will raise interest rates one more time in October or December, but the possibility of a rate hike in October has decreased considerably in light of Prime Minister Kishida's decision not to run for office," Tanahashi said.
In addition to private consumption, Japan's capital spending also contributed to the GDP growth, rising by 0.9% in the second quarter, in line with market expectations. However, external demand, measured as exports minus imports, slightly detracted from growth, indicating ongoing pressures on Japan's export-driven sectors.
The economy has also benefited from a resurgence in tourism, which has helped to boost retail sales. Companies like Fast Retailing, the owner of Uniqlo, have reported strong domestic market performance, driven by a surge in duty-free sales. The government has projected that spending by tourists could reach 8 trillion yen ($54.74 billion) this year, underscoring the sector's role in Japan's economic recovery.
While the domestic economy shows signs of strength, the global economic environment remains a concern. Japan's economy minister, Yoshitaka Shindo, highlighted the need to monitor risks from economic downturns overseas and potential market volatility, particularly in light of growing concerns over a possible U.S. recession.
The Bank of Japan's recent interest rate hike, coupled with plans to taper its massive bond-buying program, marks a significant shift in its monetary policy. Japan stands out as a global outlier in its rate-raising efforts, especially as other major central banks, including the U.S. Federal Reserve, have started to ease their policies.
Marcel Thieliant, head of Asia-Pacific at Capital Economics, noted that the increase in consumption "should encourage the Bank of Japan to press ahead with another rate hike later this year," reflecting the broader sentiment among economists who see the recent GDP figures as a strong indicator of Japan's economic resilience.
