Solid Japanese GDP Not Enough To Ensure Boj Rate Hike

(MENAFN- ING)

0.5%	2Q25 GDP %QoQ sa vs 0.3% flash estimates
Higher than expected

The economy rose firmly despite US tariffs

Japan's economy grew solidly despite US tariffs in the second quarter, by a 0.5% quarter-on-quarter pace. That's stronger than the initial 0.3% increase. Private consumption grew 0.4% (vs 0.2% flash estimate), marking the fifth consecutive quarter of growth. Non-residential investment was revised down to 0.6% (vs 1.3% flash estimate). This marked the third quarterly rise. Significant adjustments in the inventory contribution (0.0 ppt from -0.3 ppt) was a key factor behind the upward revision.

Private consumption and net exports positively contributed to 2Q25 GDP


Source: CEIC We expect a contraction in the current quarter

Following the revision of 2Q25 GDP results, we have updated our growth outlook. We believe that the front-loading of shipments resulted in stronger exports, which should lead to a more pronounced technical correction in the current quarter. Residential investment is likely to be restrained by stricter building construction rules introduced recently. Additionally, the inventory cycle appears less favourable than previously expected, suggesting a negative contribution to growth. So, we now expect a 0.3% contraction in 3Q25 (vs -0.1% previous estimate). While weakness in exports and investment is expected to constrain overall growth, private consumption is likely to remain robust. Recent labour earnings trends have shown that solid wage growth continued, while inflation is expected to cool down, particularly in food and energy. Thus, both are helping to improve consumers' purchasing power. On top of that, expected fiscal stimulus comes into play for the second half, supporting domestic growth. Thus, we believe that the economy is likely to avoid a recession. For 2025 GDP, we have revised it up to 1.1% year-on-year from 0.9%.

Meanwhile, Japanese political uncertainty will likely dampen market sentiment

On Sunday evening, Japanese Prime Minister Shigeru Ishiba announced his resignation following the Liberal Democratic Party's defeat in the July election. This news led to a weakening of the yen. Japanese government bond futures rose, possibly in response to the movement in US Treasuries. However, concerns over Japan's fiscal outlook in the market are growing, thus a long-end JGB sell-off and curve steepening are likely to follow.

There are two main candidates for the prime minister position. Both are from LDP but they have different policy approaches. One supports fiscal expansion and a more accommodative monetary policy, while the other advocates for structural reforms and maintains a neutral stance on current monetary normalisation. A local newspaper reports that the election is likely in early October and will set the macro policy direction. Yet as the LDP coalition lacks a majority, strong policies may not be implemented afterwards.

BoJ watch

From the viewpoint of political uncertainty, the likelihood of a rate hike in October has decreased. The overnight indexed swap (OIS) implies about a 43% chance of a BoJ's rate hike by the end of the year, down from 70% last week. From a macro data perspective, even if we expect a temporary contraction in the current quarter, solid growth in 1H25, firm wage growth, and above-2% inflation are likely to support the BoJ's rate action. We are keeping our October hike call, but risks to this outlook are increasing.

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