Japan’s economy expanded at a much stronger-than-expected annual rate of 3.1 percent in the second quarter, recovering from a decline at the start of the year thanks to strong consumer growth, providing the case for further interest rate hikes in the near future.
The Bank of Japan had projected that a robust economic recovery would help lift inflation sustainably to its 2% target, justifying further rate hikes after last month’s as it seeks to move away from years of massive monetary stimulus.
The gross domestic product (GDP) growth rate, released by government data on Thursday, beat market median forecasts of a 2.1% increase and came after an upward revision to a 2.3% contraction in the first quarter.
The figure represented a 0.8 percent quarterly increase, beating the 0.5 percent increase expected by economists in a Reuters poll.
“Overall the results are good, and there are signs of a recovery in personal consumption, supported by rising real wages,” said Maeda Kazutaka, an economist at Meiji Yasuda Research Institute.
“This confirms the BOJ’s view and signals further rate hikes, but the yen surged after the last rate hike, so the BOJ is likely to remain cautious.”
Private consumption, which accounts for more than half of economic output, rose 1.0%, beating the expected 0.5% increase and marking the first increase in five quarters.
Private consumption, a weak spot in the economy, has been sluggish over the past year as households struggle with rising living costs, in part due to higher import prices caused by a weak yen.
Public dissatisfaction with the rising cost of living was one of the factors that prompted Japanese Prime Minister Fumio Kishida to announce his resignation next month.
“We fundamentally expect consumption to continue to recover,” said Kengo Tanahashi, an economist at Nomura Securities.
“This summer, in addition to the fixed tax cuts that began in June and subsidies for electricity and gas bills from August, wage negotiations in the spring offensive are going well again this year, and we expect that increased income will boost consumption.”
The influx of tourists is also helping to boost sales at Japanese retailers. Fast Retailing, owner of the clothing brand Uniqlo, highlighted in its latest financial results that the domestic market is booming thanks to a surge in duty-free sales.
Tourist spending this year is expected to reach 8 trillion yen ($54.74 billion), according to the government, which sees tourism as a key growth engine in an economy long slumping due to an aging population.
Business investment, a key driver of private demand-led growth, rose 0.9 percent in the second quarter, in line with the median forecast in a Reuters poll.
External demand, exports minus imports, dragged down growth by 0.1 percentage point, the data showed.
The Bank of Japan raised interest rates last month and detailed plans to scale back its massive bond purchases in a further step toward phasing out its massive monetary easing program.
Japan has become a global outlier in raising interest rates at a time when most major central banks, including the U.S. Federal Reserve, have begun easing policy or are moving in that direction.
Marcel Thierryand, head of Asia Pacific at Capital Economics, said the first increase in consumption in more than a year “should encourage the Bank of Japan to raise interest rates further this year.”
