Japan Economy Grows 1.4% in Q2 as Business Spending Surpasses Expectations

Japan's economy grew faster than initially estimated in the April-June quarter, driven by business spending that was less weak than expected. The revised data from the Cabinet Office showed an annualized growth rate of 1.4% in the second quarter, compared to the initial estimate of 1.1%. This upward revision reflects the release of capital spending data last week, which indicated Japanese firms increased spending on plant and equipment by 1.6% in the second quarter from a year earlier.

The revised GDP growth rate was above the median forecast of 1.6%, but below the estimated annualized rate. The economy expanded 0.4% without annualization, matching the median forecast and beating the preliminary reading of a 0.3% rise. Kento Minami, senior economist at Daiwa Securities, noted that the growth in this quarter was notable given the potential downward pressure from the Middle East conflict.

The Bank of Japan is expected to raise its policy rate next week, with markets widely seeing it as a done deal. The central bank remains under pressure to push borrowing costs higher amid price pressures from the war and the yen's downward trend. Swap rates indicate a 98% chance for the BOJ to raise its policy rate by 25 basis points to 1.25% at its September meeting.

The revised data also showed private consumption was flat, matching the initial data, while external demand added 0.5 percentage point to GDP growth, unchanged from the preliminary data. Domestic demand knocked off 0.1 percentage point, better than a 0.2% drag in the initial estimate.