Tokyo: Japan's second-quarter growth of 0.3% on a quarterly basis and 1.1% on an annual basis fell short of expectations, fueling a policy divide between the Bank of Japan and Tokyo over how to handle the country's rising inflation.
According to Anadolu Agency, exports were the main driver of growth, though a weaker yen limited their contribution. Weak domestic demand and capital spending also weighed on the economy. The effects of the war in the Middle East also began to appear in Japan's economic data.
The weaker-than-expected growth fueled expectations that the Bank of Japan's room to tighten monetary policy could narrow. Japan's inflation rose from 1.4% in April to 1.5% in May and 1.7% in June, while it is expected to reach 1.9% in July. The combination of weaker growth and rising inflation complicates Japan's economic policy path. The Bank of Japan plans to raise interest rates because of inflationary pressures, while Tokyo favors further fiscal expansion in response to slowing growth.
Asian markets analyst Sadi Kaymaz told Anadolu that Prime Minister Sanae Takaichi's falling approval ratings and the cost of living should also be considered when predicting what may come next. "These factors keep fiscal expansion and additional spending on the agenda, but the bond markets aren't receptive to additional spending, and they see it as contrary to fiscal health, demanding a higher risk premium," Kaymaz said.
The Bank of Japan was "more concerned over inflation and felt more confident about wage increases and growth, but we can say that with the release of this growth data on Monday that this confidence may have somewhat waned," he said. Kaymaz added that the data would have to show continued cooling in growth to cause concern.
He said Japanese inflation is generally supply-driven, meaning weakness in demand should be considered secondary, while inflationary pressures continue in imports of raw materials and intermediate goods. Kaymaz said wage increases are continuing and real wages are a key condition for ensuring sustainable and healthy inflation, adding that it is too early to discuss the risk of recession or disinflation.
"We should also pay attention to artificial intelligence developments," he said. "Japan's semiconductor sector is strong and the investment environment stays vibrant - if there was a sudden pullback or freeze in AI investments, the recession possibility could increase."
"I'd like to say once again that the quarterly data does not point to a recession risk yet," he added.