Japan raises third-quarter GDP growth, but the market still has concerns about a rate hike in December

Due to revisions in capital investment and export data, Japan's economic growth rate from July to September exceeded earlier expectations, seemingly bringing hopes for interest rate hikes in the short term. However, the downward revision of consumption data for the quarter has led some analysts to believe this indicates the fragility of Japan's economic recovery, making a rate hike in December uncertain.

Today, the latest revised data released by Japan's Cabinet Office shows that Japan's GDP grew at an annualized rate of 1.2% in the third quarter, surpassing analyst expectations and higher than the initial estimate of 0.9%; after adjusting for prices, Japan's GDP grew by 0.3% quarter-on-quarter, higher than the initial estimate of 0.2%. Specifically:

The decline in capital expenditure was smaller than expected, decreasing by only 0.1%, less than the preliminary estimate of a 0.2% drop; the drag from external demand on growth was also smaller than the preliminary estimate, falling from 0.4% to 0.2%; however, private consumption, which accounts for more than half of Japan's economy, grew by only 0.7%, lower than the preliminary estimate of 0.9%.

The Bank of Japan will hold its next policy meeting on December 18-19, and this data may become one of the reference factors for interest rate adjustments. Nomura Securities economist Uichiro Nozaki stated:

"While this data will not significantly boost expectations for a rate hike, it will not become an obstacle to raising rates either."

However, even with Japan's upward revision of third-quarter GDP growth, it remains much slower compared to the annualized growth of 2.2% in the April to June quarter. Previously, the Bank of Japan gradually exited its decade-long aggressive stimulus policy in March and raised short-term interest rates to 0.25% in July. Bank of Japan Governor Kazuo Ueda stated, if the central bank becomes more confident that the inflation rate can stabilize around 2% with the support of wage growth and strong domestic demand, the central bank is prepared to raise rates again.

Nevertheless, the market remains cautious about the outlook for Japan's economy, with overseas uncertainties such as the potential for U.S. President Trump to raise tariffs casting a shadow over Japan's economic prospects. Masato Koike, a senior economist at Sompo Institute Plus, stated:

"Although the increase in real wages will support consumption, the recovery of external demand will be suppressed due to stagnation in overseas growth. Japan's economy will continue to recover, but at a slow pace."

Many market participants expect the Bank of Japan to raise rates again before the end of the fiscal year in March, but there is disagreement on whether the specific timing will be in December this year or early next year.

Considering the weak consumption, the cautious decision-making style of the Bank of Japan's governor, and concerns about Trump's economic policies during a potential second term, sources cited by Reuters also indicated, "The Bank of Japan is cautious about the timing of the next rate hike, and the suspense over whether to raise rates in December remains."