Japan's economy demonstrated stronger-than-expected growth in the second quarter, accompanied by a significant rise in wages, bolstering prospects for an interest rate increase by the Bank of Japan (BOJ) in its upcoming policy meeting. Revised government data released Tuesday showed gross domestic product (GDP) expanded at an annualized rate of 1.4% from the previous quarter, up from an earlier estimate of 1.1%, although still below the median forecast of 1.8% among economists.
The Cabinet Office attributed the revised growth to increased government spending and a more favorable trade balance. A smaller-than-initially reported decline in business fixed investment also played a role, with capital spending contracting 0.9% compared to a previous estimate of a 1.2% drop. Despite the positive revision, consumer spending—which accounts for roughly half of GDP—remained flat, unchanged from the preliminary report, continuing to pose concerns amid ongoing household financial pressures.
Nomura Securities’ chief market economist Kohei Okazaki noted that the data presents no obstacles to a rate hike in September, highlighting the underlying stability in domestic demand. The BOJ’s Monetary Policy Board is widely expected to raise its benchmark interest rate at its next meeting on September 18, a view supported by swap contract pricing.
Additional data released alongside the GDP report further supports the case for tightening. Nominal wages climbed 4.7% year-on-year in July, the sharpest increase since 1997 and marking a sixth consecutive month of gains exceeding 3%, reflecting tight labor market conditions and robust corporate earnings. Bank lending also accelerated, maintaining growth above 5% for the fifth straight month, signaling that previous BOJ rate hikes have yet to significantly dampen credit demand.
Despite headwinds from rising energy costs linked to the conflict in the Middle East, demand for artificial intelligence-related products and services has helped offset some economic pressures. Corporate profits reached record highs last quarter, underscoring resilience amid global uncertainty. Bloomberg economist Taro Umeura observed that upward GDP revisions indicate the economy is growing above its potential level, raising concerns about inflationary pressures from the BOJ’s prolonged accommodative stance.
Prime Minister Sanae Takaichi’s government has taken measures to support consumption, including releasing oil reserves after the U.S. strike on Iran and introducing free school lunches, which shifted some expenditures from private consumption to government outlays. Government spending rose by 6.9% on an annualized basis, the largest increase since early 2024. Takaichi also plans to reduce the sales tax on food and soft drinks from April to stimulate household spending.
Meanwhile, Japan’s 10-year government bond yields recently hit 3%, a three-decade high, as investors monitored fiscal policy developments and global bond market volatility. U.S. Treasury Secretary Scott Bessent recently suggested that Japan should conclude its reflationary policies now that deflation appears to be ending, implicitly encouraging the BOJ to continue raising interest rates.
Looking ahead, some economists, including Okazaki, see the potential for further rate increases later in the year, possibly in December, if the economy continues on its current trajectory.