TOKYO: Japan’s economic growth unexpectedly slowed in the three months through June, a result that can likely complicate the Bank of Japan’s (BoJ) policy communications as it weighs the timing of its next rate increase.
Real gross domestic product grew 1.1% on an annualised basis in the second quarter as capital spending continued to slump in the face of uncertainties stemming from the Middle East conflict and private consumption flatlined under the weight of inflation, a Cabinet Office report indicated yesterday.
That was slower than a revised 1.9% pace in the previous quarter and fell short of economists’ forecast for 2% growth, while still marking a third consecutive expansion.
Capital investment fell 1.2% on a non-annualised basis, a steeper decline than the revised 1% drop in the previous period. It missed the estimate for 0.5% growth.
“Consumption was quite weak,” said Keiji Kanda, chief economist at Daiwa Institute of Research.
“The decline in non-durable goods was larger than expected, and considering that consumption was not as strong as expected and that capital spending was weak, my assessment is that the overall result was not particularly strong either.”
The figures came as Japan’s economy faces fallout from the conflict in the Middle East, which has pushed up prices for fuel and products made with petroleum while also upending some supply chains.
Private consumption came in flat, missing the consensus estimate for a 0.4% advance. That result likely reflects a reluctance to spend among shoppers frustrated with rising costs of living.
The indications of weak domestic demand will be a concern for Prime Minister Sanae Takaichi, whose approval ratings have begun to dip some six months after a landslide electoral triumph as consumers dealing with persistent increases in prices see her focusing too much on other non-urgent issues.
Even so, the figures aren’t likely to derail the BoJ from its rate hike path.
As of yesterday morning, traders were seeing a 80% likelihood of the BoJ hiking its benchmark rate when it next decides policy on Sept 18, according to pricing in the overnight swaps market.
If the BoJ proceeds with a hike, it may be harder for authorities to cite the economy as the driving force for that decision, as opposed to the weak yen.
Japan’s currency strengthened a tad after the data, touching 159.04 to the dollar from around 159.21 just before the release.
The yen has pared gains since US and Japanese authorities intervened to support it at end-July, and it remains considerably weaker than its 10-year average of 126.09.
Looking ahead, Japan’s economy faces a mix of supportive and adverse factors.
Still, solid wage gains resulting from annual pay negotiations and government subsidies are expected to help underpin household spending, economists said.
That could give the BoJ confidence to move ahead with a hike next month. — Bloomberg
