Solid Japanese GDP is not enough to ensure boj tariff increases

The economy rose strongly even though there was a US tariff

The Japanese economy grew solid even though the US tariff in the second quarter, with a speed of 0.5% quarter-to-quarter. It is stronger than the initial increase of 0.3%. Private consumption grows 0.4% (vs. Flash estimation 0.2%), marking the fifth quarter in a row of growth. Non-resources investment is revised to 0.6% (vs. Flash estimation 1.3%). This marks the third quarterly increase. Significant adjustment in the contribution of inventory (0.0 ppt of -0.3 ppt) is a key factor behind the revision and above.

We expect contractions in the current quarter

Following the revision of the 2Q25 GDP results, we have updated our growth prospects. We believe that the loading front of shipping produces stronger exports, which must cause clearer technical corrections in the current quarter. Housing investment is likely to be detained by a tighter building construction rules that are introduced recently. In addition, the inventory cycle seems unfavorable than previously expected, showing negative contributions to growth. So, we now expect a contraction of 0.3% in 3Q25 (vs -0.1% previous estimate). While weaknesses in exports and investments are expected to limit overall growth, private consumption tends to remain strong. The trend of new labor income has shown that the growth of solid wages continues, while inflation is expected to cool, especially in food and energy. Thus, both of them help increase consumer purchasing power. In addition, fiscal stimulus which is expected to play a role in the second half, supports domestic growth. Thus, we believe that the economy tends to avoid recession. For 2025 GDP, we have revised it up to 1.1% of years from years from 0.9%.

Meanwhile, Japanese political uncertainty is likely to reduce market sentiment

On Sunday night, Japanese Prime Minister Shigeru Ishiba announced his resignation after the defeat of the Liberal Democratic Party in the July election. This news caused the weakening of Yen. Bond Futures Japanese government rises, perhaps in response to the movement in Treasury US. However, concerns over Japan’s fiscal view in the growing market, so that JGB and steep selling and steep that have long been tends to occur.

There are two main candidates for the position of Prime Minister. Both come from LDP but they have a different policy approach. Someone supports fiscal expansion and more accommodative monetary policy, while other supporters for structural reforms and maintain a neutral attitude in current monetary normalization. A local newspaper reports that the selection is likely in early October and will determine the direction of macro policy. However, because the LDP coalition does not have the majority, strong policies may not be implemented afterwards.

Boj Watch

From the point of view of political uncertainty, the possibility of an increase in interest rates in October has declined. The Overnight Indexed Swap (OIS) implies around 43% of the chances of an increase in Boj interest rates at the end of the year, down from 70% last week. From the perspective of macro data, even if we expect temporary contractions in the current quarter, solid growth in 1H25, company wage growth, and inflation above-2% tend to support BOJ level actions. We maintain the call to our October increase, but the risk of this view has increased.
Source: Ing