BOJ Rate Hike Imminent as Japan's Economy Fails to Meet Forecasts

Japan's economy slowed down in the second quarter of this year, missing market forecasts due to weaker household and business spending. The country's gross domestic product (GDP) rose by 1.1% in annualized terms, which is lower than the median market estimate of 2.0%. Analysts say that while the data reveals some temporary soft patches in demand, the underlying momentum remains robust and inflationary pressures persist.

According to Naoki Hattori, chief Japan economist at Mizuho Research Institute, 'Today's GDP data was a bit weak but the economy is likely to continue recovering moderately.' He added that given risks of underlying inflation overshooting its target, the Bank of Japan (BOJ) is likely to proceed with a rate hike next month.

Sources have told Reuters that the BOJ is set to raise rates as soon as September and consider hiking more aggressively thereafter to avoid being behind the curve on inflation. The benchmark 10-year Japanese government bond yield rose for a sixth consecutive session, hitting a three-decade high.