Japan’s economy bounces back, supporting case for more rate hikes

Japan’s economy expanded by a much faster-than-expected annualized 3.1% in the second quarter, rebounding from a slump at the start of the year thanks to a strong rise in consumption and backing the case for another near-term interest rate hike.

The Bank of Japan had forecast that a solid economic recovery will help inflation sustainably hit its 2% target, and justify raising interest rates further after it hiked them last month in its continued quest to exit years of massive monetary stimulus.

The increase in gross domestic product (GDP) compared with a median market forecast for a 2.1% gain, and followed an upwardly revised 2.3% contraction in the first quarter, government data showed on Thursday.

The reading translates into a quarterly rise of 0.8%, beating a 0.5% increase expected by economists in the Reuters’ poll.

“The results are simply positive overall, with signs for a pick-up in private consumption backed by real wage growth,” said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

A man looks at an electronic quotation board displaying stock prices of Nikkei 225 on the Tokyo Stock Exchange in Tokyo on August 2, 2024.

Related article Japan stocks plunge by nearly 6% in biggest drop since start of pandemic

“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.”

Private consumption, which accounts for more than half of the economic output, rose 1.0%, compared with forecast for a 0.5% increase and the first gain in five quarters.

Private consumption has been a soft spot in the economy, which has stuttered over the past year as households struggle with rising living costs,