Japan’s economy grew faster in Q2 after officials raised the GDP estimate

Japan raised its second-quarter GDP estimate because households spent more and businesses kept investing, showing that domestic demand is stronger than expected.

The Cabinet Office had earlier reported that its economy grew by a mere 0.1% but new figures show that it’s actually by 2.2%. This stronger growth shows that the world’s fourth-largest economy is holding up well, despite high inflation, worker shortages, and pressure from U.S. tariffs.

Government lifts GDP numbers after stronger household spending

Private consumption increased by 0.4% compared to the first estimate of 0.2%. This indicates that the country’s economy depends heavily on household spending as families spent more money on goods, services, and leisure activities than the previous report suggested.

The report also showed that capital expenditure rose by 0.6%, lower than the 1.3% that was first estimated. This proves that businesses were more cautious about spending, while households loosened their wallets.

But even with the drop in business spending, the stronger consumer demand raised the overall gross domestic product by 0.5% on a quarter-to-quarter basis. This is higher than the estimated 0.3% that policymakers and analysts initially believed. 

The new numbers indicate that the economy’s strength came from within Japan rather than from exports. Net exports accounted for 0.3% of GDP growth, while domestic spending added 0.2%. Inventories also showed no contraction as compared to the first report. 

Economists associate the growth with rising wages and domestic demand. In July, the nominal wages (which don’t change for inflation) rose faster in seven months, while real wages (which account for higher prices) also improved slightly. This gave families more purchasing power.

Economists connect growth to rising wages and domestic demand

The Bank of Japan has been trying to guide the country’s economy out of decades of weak inflation, and there seems to be a glimmer of hope with these new statistics. Economists say the country had previously depended on overseas markets for many years, leaving it vulnerable to global trade shocks, especially from U.S tariffs. The revised data, however, creates a cycle in which higher incomes encourage families to purchase more goods and services, and in turn, companies feel more confident in raising prices. 

Chief economist at Norinchukin Research Institute, Takeshi Minami, stated that the latest report shows “a positive cycle of wage increases and rising prices as the BOJ anticipated.” He also suggested that the central bank may soon raise interest rates because the economy appears to be able to sustain growth without too much monetary support. 

The BOJ faced years of criticism for maintaining low interest rates and relying heavily on large bond purchases to stabilize the economy. However, bank officials responded, stating they needed proof of stronger domestic demand before normalizing their rates. 

However, economists remain cautious as the external environment becomes more difficult, even as domestic demand improves. They warn that Japan’s recovery could be short-lived if external risks like the slow global growth and trade tensions continue to add more pressure. 

Economists believe it will be extremely difficult for Japan to fully break away from its dependence on overseas demand due to external risks already evident in trade data. Exports to the United States dropped by more than 10% in July compared to last year. Autos and auto parts, a cornerstone of Japan’s industrial base and a key source of employment, were the sectors most affected.

Although Japan and the U.S. signed a trade agreement in July that reduced tariffs on cars and other products, analysts still doubt whether it will be enough to cushion the bigger impact of the U.S. Trade tariffs.

Politics in Japan has also seen better days, as Prime Minister Shigeru Ishiba announced his resignation following election setbacks that most people blamed on the rising cost of living. This has left many households struggling even as wages increase. 

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