Driven by the recovery of household and corporate consumption, Japan's economy grew more than expected in the second quarter.

On August 15, the Japanese government reported that GDP increased by 0.8% quarter-on-quarter in the second quarter, higher than the expected 0.6%, reversing the revised 0.6% decline in the first quarter. The initial annualized quarterly GDP growth rate for Q2 was 3.1%, which also exceeded the expected 2.1%. This was mainly due to the growth of automobile and other durable goods consumption.

After the data was released, the Nikkei 225 index rose 0.43%, and the TOPIX index rose 0.76%. The yen slightly strengthened against the US dollar, at 147.18.

As of press time, the Nikkei 225 index rose 0.78% to 36726 points.

Private consumption growth in Q2 drives GDP growth in Japan.

In the second quarter, private consumption in Japan rose 1% quarter on quarter, achieving its first growth in five quarters. Consumption of automobiles, appliances, and other durable goods increased by 8.1% year on year; consumption of semi-durable goods such as clothing increased by 2%; purchases of non-durable goods such as food increased by 0.8%.

Previously, the Bank of Japan raised interest rates to 0.25% in late July, planned to reduce large-scale purchases of government bonds, and hinted at the possibility of further interest rate hikes. These measures indicate that the central bank's confidence in the national economic recovery continues to increase and highlight its concerns about the weak yen. When determining monetary policy, the Bank of Japan emphasized the need for wage increases and benign inflation cycles.

The Ministry of Labor's data for June showed that actual wages in Japan rose for the first time since March 2022, an increase of 1.1% year-on-year. However, this figure includes bonuses, and normal wage levels have actually decreased by 1%.

Against the backdrop of rising wages, some consumption indicators in July showed certain growth.

According to a survey by economic watchers in the Cabinet Office, the family trend index reflecting domestic tourism and domestic demand increased by 0.2 points.

According to data from the Japan Automobile Dealers Association and the Japan Light Motor Vehicle and Motorcycle Association, new car sales in July increased by 7% year on year and bounced back from a significant decline after the large-scale car safety scandal.

In the public sector, government consumption increased by 0.1%, and public investment increased by 4.5%. Non-residential investment by companies and private residential investment both increased.

Can Japan's consumption continue to grow?

There are different views in the market about whether Japan's consumption can continue to grow, but they are closely related to Japan's inflation situation and the Bank of Japan's monetary policy. Currently, Japan's inflation rate is still higher than the Bank of Japan's target of 2%. In June, the core consumer price index excluding food rose 2.6% year on year.

Some believe that Japan's deflationary situation has been brought under control and the Bank of Japan will continue to hike interest rates. Taro Saito, a research fellow at the NLI Institute, said:

"I expect that due to the tax cuts that began in June, consumer spending for the July-September quarter next year will continue to grow by around 3%, and I believe that our economy has overcome deflation."

Marcel Thieliant, head of macro research for the Asia Pacific region at Capital Economics, said in a report after the announcement:

"The strong rebound in second-quarter GDP was driven by the first consumption growth in over a year, and this data should encourage the Bank of Japan to hike interest rates again later this year."

However, Q2 consumption growth is closely related to a one-time tax reduction policy (a reduction of 40,000 yen per person), and the impact of this stimulus will gradually diminish. Saito said that the real-wage increase in June was temporary for a long time, but he expects wages to maintain steady growth from October.

In addition, some are concerned that the current Japanese economy is not strong enough to withstand the Bank of Japan's continuous rate hikes, as premature hikes may cause inflation to fall sharply and lead to an economic slowdown. The market cannot determine whether Japan has truly overcome the price decline caused by the economic collapse of the early 1990s. Hideo Kumano, chief economist at Dai-ichi Life Research Institute, pointed out:

Recent market volatility in stocks may have an adverse impact on the Japanese economy. Declining stock prices may lead to slower wage growth, economic decline, and the specific outlook for the Japanese stock market depends on the future economic data of the USA in the coming months.

Editor/ping