Japan's Economy Rebounds with Surprising Growth Rate

Japan's economy grew 3.1% annually in Q2, driven by increased consumption, surpassing forecasts. The Bank of Japan aims to hit a 2% inflation target and may hike interest rates. Public discontent over living costs led to PM Fumio Kishida's resignation. Tourism and capital spending also boosted growth.

Japan's economy expanded at an impressive annualized rate of 3.1% in the second quarter, defying expectations and rebounding from an earlier slump. This surge is largely due to increased consumption, bolstering the case for another imminent interest rate hike by the Bank of Japan (BOJ). The BOJ had previously forecasted that a strong economic recovery would help achieve its 2% inflation target, justifying further rate hikes following last month's increase amid an ongoing effort to move away from years of extensive monetary stimulus.

Government data released on Thursday showed a 0.8% quarterly GDP rise, surpassing the predicted 0.5% increase. Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, stated, "The results are simply positive overall, with signs for a pick-up in private consumption backed by real wage growth." However, the central bank remains cautious as the previous rate hike led to a sharp appreciation of the yen.

Private consumption, making up over half of Japan's economic output, rose by 1.0%—its first gain in five quarters. This recovery comes amid rising living costs, exacerbated by higher import prices due to a weak yen. Public dissatisfaction with these rising costs contributed to Prime Minister Fumio Kishida's decision to announce his resignation. Increased tourism has also played a crucial role in boosting retail sales, with spending by tourists expected to hit 8 trillion yen ($54.74 billion) this year. Capital spending rose 0.9% in Q2, aligning with market forecasts, while external demand slightly dampened growth.

(With inputs from agencies.)