Japan Q2 Growth Misses Forecasts on Weaker Spending, Investment

• Japan's economy slowed in the second ​quarter and missed market forecasts on softer household and business spending, highlighting the fragile nature of its recovery as the Middle East war clouds the outlook. Japan's economy slowed in the second quarter and missed market forecasts on softer household and business spending, highlighting the fragile nature of its recovery as the Middle East war clouds the outlook.
• However, long-term ‌bond yields hit a three-decade high as investors brushed aside the soft reading as reflecting one-off factors and focused more on mounting inflationary risks that could prod the Bank of Japan to raise interest rates next month.
• Gross domestic product rose 1.1% in annualised terms, government data showed on Monday, missing a median market estimate of 2.0% in a Reuters poll and below a revised 1.9% expansion in the previous quarter. While the data revealed some temporary soft patches in demand, analysts say robust underlying momentum and persistent price pressures are likely to keep the case for imminent interest rate hikes intact.
• Reuters reports that the BOJ is set to raise rates as soon as September and is considering a more aggressive pace of tightening thereafter to avoid falling behind the curve on inflation. The benchmark 10-year Japanese government bond (JGB) yield rose for a sixth straight session on Monday to hit a 30-year high of 2.925%, as investors continued to price in BOJ rate hikes sooner and faster than earlier expected. Private consumption was the biggest disappointment in the GDP data, falling 0.02% versus market expectations for a 0.5% increase, the first drop in eight quarters.
• Analysts said the weakness was due in part to lower school fees households paid thanks to subsidies, which pushed down headline private consumption but lifted government spending. Capital spending, a key driver of private demand, fell 1.2% in the second quarter, confounding market forecasts for a 0.4% increase. However, capital expenditure, as well as overall preliminary GDP, tend to be revised higher with updated figures. Exports remained resilient thanks to solid U.S. demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence that supported shipments of semiconductor-related equipment and components.
• Looking ahead, analysts cautioned that rising import costs and mounting upstream price pressures could eventually feed through to consumers, posing a risk to spending later this year. Aside ⁠from rising fuel costs from the Middle East conflict, a weak yen has lifted import prices and broader cost-of-living for households, posing a headache for policymakers. Such price pressures have led to a flurry of hawkish comments from BOJ policymakers that bolstered the case for an early rate hike.

(Source: Reuters)