Japan’s economy unexpectedly slows as capital spending slips

Japan's economy experienced a slower-than-anticipated growth in the second quarter of 2023, with real gross domestic product (GDP) expanding by 1.1 percent annually, according to a Cabinet Office report released on August 17. This growth rate was lower than the previous quarter's revised 1.9 percent and fell short of the economists' forecast of 2 percent growth, marking the third consecutive quarter of expansion.

The slowdown was primarily attributed to a significant decline in capital spending, which dropped by 1.2 percent non-annually, a steeper decrease than the estimated 1 percent drop in the previous period and missing the estimate for a 0.5 percent increase. Keiji Kanda, chief economist at Daiwa Institute of Research, attributed the weak performance to a sluggish consumption sector, with the decline in nondurable goods being larger than expected.

The unexpected slowdown could pose challenges for the Bank of Japan (BOJ) as it contemplates the timing of its next rate hike, with traders currently pricing an 80 percent likelihood of a rate increase at their next policy meeting on September 18. The combination of weak domestic demand and rising consumer costs, coupled with a string of generally positive corporate data releases, has contributed to the mixed outlook for Japan's economic recovery.