The economy has now grown for five consecutive quarters, as policymakers sought to manage challenges ranging from persistent inflation to the fallout from higher US tariffs. The string of gains wasn’t enough to keep Prime Minister Shigeru Ishiba in his job. The premier announced Sunday that he’ll step down, setting in motion a leadership race that may raise questions about the policy outlook and unsettle investors.
“The report confirms that consumer spending is gaining momentum and capital investment remains positive despite a downward revision,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “This outcome reflects a positive cycle of wage increases and rising prices as the BOJ anticipated, and I believe the timing for an interest rate hike is approaching.”While personal consumption was revised higher to 0.4% from a preliminary 0.2% advance, business spending was revised lower to show a 0.6% advance, versus the initial reading of a 1.3% gain. Net exports were unchanged, contributing 0.3 percentage point to growth, while inventories were revised higher to a flat reading from a previous minus 0.3 percentage point contribution.
Also Read: Japanese markets rise but Yen falls as Ishiba set to depart
Japan’s continued growth underscores the resilience of businesses even as a labour shortage drives up personnel costs, persistent inflation exerts a drag on consumption, and President Donald Trump’s tariffs upend exports to the US.
What Bloomberg Economics Says…
“Japan’s surprisingly strong revised second-quarter GDP will probably be taken by the Bank of Japan as another indication that the wage-price cycle is intact despite external pressure on the economy. This supports our view that the BOJ will raise rates in October.”
— Taro Kimura, economistWith Ishiba having announced his plans to resign, the Liberal Democratic Party will now hold a leadership race. A focus of the campaign will be any pledges to help households cope with inflation, as consumer frustration over soaring costs of living was a key factor behind the election setbacks that ultimately doomed Ishiba’s administration.
The LDP lacks a majority in either house of parliament, so whoever leads the party will need to work closely with the opposition parties to implement policies. Some opposition parties have called for tax cuts to spur spending, a source of concern for bond investors fretting over the nation’s burgeoning national debt.
The Bank of Japan has maintained its stance that it will keep raising interest rates if its price and growth forecasts materialise. BOJ Deputy Governor Ryozo Himino reiterated that view last week while steering clear of making any hints as to when the next move might happen. Economists generally expect authorities to hold settings steady when they next set policy on September 19.
The BOJ welcomed a July 22 trade deal between Japan and the US as a positive step to ease economic uncertainties that have kept it from raising interest rates. Last week, Trump issued an executive order to implement that deal, which will reduce tariffs on US imports of Japanese cars to 15% and end the stacking of previous tariffs on top of 15% universal tariffs.
Exports have fallen for three months through July, sustaining their steepest drop in more than four years in that month. Exports to the US dropped by 10.1% from a year earlier, with the value of shipments of vehicles and auto parts plunging 28.4% and 17.4%, respectively.
“The impact of Trump tariffs remains limited for now,” Minami said. “However, going forward, I believe negative effects will inevitably emerge to some extent.”
Government data indicate that Japanese carmakers have been cutting prices while maintaining the volume of their exports to the US, sacrificing profit margins to preserve market share. The nation’s manufacturers recorded an 11.5% decline in pretax profit in the April-June period, with makers of transport equipment recording a 29.7% decline. There are concerns that the tactic could crimp their ability to keep raising wages.
In July, nominal wages rose the most in seven months, with real wages adjusted for inflation edging up, while household spending rose for a third month. The BOJ has been hoping to see wage growth that beats inflation in hopes that it will spur personal spending and support demand-led price gains as the nation tries to definitively exit deflation.
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