Japan growth slows, casting doubt on BoJ rate hike

Japan's economy expanded by 0.3% in the April-June quarter, falling short of the 0.5% growth forecast and down from 0.5% in the previous quarter, according to official data released on Monday. This slower growth complicates the Bank of Japan's (BoJ) plans to raise interest rates, as it grapples with a weaker yen. On an annualized basis, the economy expanded by 1.1%, below the expected 2.0% and the 1.9% growth in the January-March quarter.

The weaker-than-expected figures were due to a decline in capital expenditure and flat private consumption, which fell short of market expectations. Higher oil prices have increased Japan's import bill and driven up consumer prices, a situation exacerbated by the weaker yen and Prime Minister Sanae Takaichi's unpopular spending plans. The currency has been under pressure due to elevated oil import costs and concerns over her fiscal policies.

Bloomberg Economics' Taro Kimura stated that the figures weaken the case for a September interest rate hike, as markets had increasingly priced it in. The BoJ had been expected to raise rates soon as inflation accelerates in the world's fourth-largest economy. Marcel Thieliant from Capital Economics considered the expansion "decent" and noted that the government's spending is starting to impact the economy, with a 5.4% annual increase in nominal government consumption since 2021. This suggests that Takaichi's expansionary fiscal policies are beginning to have an effect.

A rate hike could strengthen the yen, which has already lost around half of the gains following a joint market intervention by the United States and Japan last month. While a weaker yen benefits Japanese exporters, such as Toyota, the country must pay more yen for oil imports, which are priced in dollars. Takaichi, who succeeded her predecessors amid inflation concerns, has expanded government support for voters, approving further aid and energy tax rebates.

She also announced a cut in the consumption tax on food products from 8% to 1%, a move that will cost the government an estimated 10 trillion yen in lost tax revenues over two years. This deepens concerns about public finances in a country with debts exceeding double its annual economic output, one of the highest ratios globally.