BOJ Hike Uncertainty Grows as Japan's Economy Slows

Japan's economy showed unexpected weakness in the second quarter, growing at an annualized rate of just 1.1%. This slow growth has caught the Bank of Japan (BOJ) off guard and may complicate its messaging on future interest rate hikes.

The Cabinet Office reported that capital spending continued to decline, falling by 1.2% in non-annualized terms. Private consumption also remained weak, coming in flat despite a consensus estimate for a 0.4% advance.

Keiji Kanda, chief economist at Daiwa Institute of Research, attributed the weakness in consumption to rising costs of living and inflationary pressures. The conflict in the Middle East has pushed up prices for fuel and products made with petroleum, leading to a reluctance among consumers to spend.

The BOJ's decision to hike interest rates is still expected, with an 80% likelihood of a rate increase on September 18 according to pricing in the overnight swaps market. However, this decision may be harder to justify given the weak economy and recent interventions by US and Japanese authorities to support the yen.