Japan's Economy Stumbles in Q2 with Slow Growth Rate

Japan's economy grew at an unexpectedly slow rate in the second quarter, with preliminary data showing real GDP rising just 0.3% quarter on quarter against forecasts for 0.5%. This slower-than-expected growth rate has raised concerns about the Bank of Japan's plans to normalize policy after years of ultra-loose monetary settings.

The annualized growth rate of 1.1% badly missed expectations of 2.0%, with private consumption, which makes up more than half of Japan's economy, being flat on the quarter and undershooting expectations for a 0.5% rise. Capital expenditure fell 1.2% quarter on quarter, a sharp reversal from the 0.4% gain economists had pencilled in.

The GDP deflator rose 2.6% year on year, a reminder that inflation remains well above target even as growth disappoints. This combination leaves the BOJ facing a difficult balancing act between continuing to tighten policy and addressing concerns about the domestic economy.