Thanks to the strong growth of consumer spending, the Japanese economy has rebounded from its early-year slowdown, with GDP growth in the second quarter exceeding expectations.

This means that the virtuous cycle that the Bank of Japan has long sought to establish between income and expenditure may be starting to appear, providing reasons for another rate hike.

Q2 GDP exceeded expectations.

Data showed that Japan's gross domestic product grew at an annual rate of 3.1% in the second quarter, beating the general expectation of 2.3%, while Japan's GDP shrank 2.3% in the previous quarter.

Quarter-on-quarter, Japan's GDP grew by 0.8%, exceeding economists' expectations of 0.5%.

Private consumption rose by 1%, exceeding expectations of a 0.6% increase and marking its first growth in five quarters.

Corporate capital spending was slightly higher than expected, rising 0.9% compared to the expected 0.8%. According to a report by the Bank of Japan, companies plan to increase their investment by 11% this fiscal year.

External demand (exports minus imports) fell 0.1 percentage point, and private inventories fell 0.1 percentage point, both of which were in line with expectations.

Takeshi Minami, an Economist at the Norinchukin Research Institute of Tokyo, commented that "Consumption is gradually recovering and I think it will be sustainable to a certain extent. I believe companies will also increase domestic capital investment."

To provide support for further interest rate hikes.

This is good news for the Bank of Japan, which has been looking for evidence that wage increases stimulate personal spending, generating stable demand and fueling inflation.

In July, the Bank of Japan raised its benchmark interest rate for the second time this year and announced a plan to cut monthly bond purchases in half by the first quarter of 2026.

At the time, Bank of Japan Governor Haruhiko Kuroda said that if economic data confirmed the bank's outlook, it would continue to raise interest rates.

Takeshi Minami said, "The Bank of Japan has been expressing its concern about the markets, but its true intention is to raise interest rates, which I don't think has changed at all. When conditions allow, the Bank of Japan will raise interest rates."

Bloomberg economist Taro Kimura believes that the second-quarter GDP data may help the Bank of Japan argue that its decision to raise interest rates last month was correct. Nevertheless, recent volatility in the stock market and the yen, partly due to concerns about the US economic downturn, may have made the Bank of Japan more cautious.

In addition, Japanese Prime Minister Fumio Kishida will step down in September, and analysts believe that the election of a new leader may affect the Bank of Japan's interest rate hike.

Kengo Tanahashi, an economist at Nomura Securities, believes that if the approval rating is high, Kishida's successor may hold early elections in the fall, during which time the Bank of Japan is unlikely to choose to raise interest rates.

He believes that the Bank of Japan will raise interest rates again in October or December, but the possibility of a rate hike in October has greatly diminished due to Prime Minister Kishida's decision not to run for election.