Japan's revised GDP strengthens BOJ hike outlook, sharpening focus on yen and Nikkei

Measured against the preliminary estimate, the upward revision was only a small beat, yet it missed the consensus prediction — and the more telling signal, perhaps, is that growth remained reasonably solid through a quarter in which Middle East turmoil could readily have inflicted greater damage. Such resilience is precisely what the Bank of Japan needs if it is to raise rates without looking as though it is endangering the recovery. Swap markets have already put a 98% probability on a move to 1.25% at next week's meeting and are fully pricing a subsequent hike to 1.5% by January, so Tuesday's GDP release is unlikely to move near-term rate expectations much further. Even so, it clears away one of the last objections that had been tied to the data. For the yen, a confirmed hike combined with a visible path beyond it is broadly supportive, especially given the currency weakness the BOJ has singled out as a concern. The Nikkei picture is more complicated: the growth and wage story underpins the domestic-demand and earnings narrative, but firming JGB yields as the rate path solidifies remain a drag on rate-sensitive sectors, making exporters the likelier relative outperformer in the run-up to the decision.

Tuesday's numbers were hardly spectacular, but the resilience they showed was enough to strip away the BOJ's final reason to postpone.

Summary:

• Japan's revised second-quarter GDP came in at an annualised 1.4%, against the 1.1% first estimate, but it missed the median forecast of roughly 1.6% to 1.8%.
• Non-annualised GDP rose 0.4%, matching the median forecast and coming in above the preliminary 0.3%.
• Capital spending contracted 0.9%, an upward revision from the 1.2% decline initially reported, though the drop was slightly faster than the 0.8% expected; separate capex numbers showed plant and equipment outlays up 1.6% from a year earlier.
• Private consumption was flat, consistent with the first estimate, while external demand contributed 0.5 percentage point to growth and the drag from domestic demand narrowed to 0.1 percentage point from 0.2%.
• A separate release put July real-wage growth at 2.4% year on year, the largest rise since May 2021 and the seventh consecutive month of gains.
• Tokyo Tanshi data show swap markets assigning a 98% probability to a 25 basis-point BOJ rate increase to 1.25% on September 18, and a further move to 1.5% is fully priced by January.

Japan's second-quarter expansion was stronger than first thought, adding to market conviction that the Bank of Japan will lift its policy rate on September 18. The Cabinet Office's revised figures, published Tuesday, put annualised GDP growth at 1.4%, against 1.1% in the initial reading, though the result remained below the median forecast, which had been about 1.6% to 1.8% across various surveys. Quarter on quarter, the economy grew 0.4%, which matched the median forecast and marked an improvement from the 0.3% first reported.

Most of the upward adjustment came from capital spending, which contracted 0.9% in the quarter, less than the 1.2% drop in the original estimate; last week's capex release had shown companies raising plant and equipment investment 1.6% year on year. Private consumption, representing over half the economy, was flat and matched the earlier reading. Net exports provided 0.5 percentage point to growth, the same as before, while the negative contribution from domestic demand decreased to 0.1 percentage point from 0.2%.

Kento Minami, senior economist at Daiwa Securities, said in a Reuters report that it was telling for growth to hold up at this level during an April-June period when Middle East tensions could reasonably have weighed heavily on the economy. The data, he added, gives no ground for concern about expansion and paves the way for the BOJ to raise rates. That assessment was backed by the separate wage report released on Tuesday, which showed real wages up 2.4% on the year in July — the largest gain since May 2021 and the seventh consecutive monthly increase — strengthening the argument that Japan's wage-driven recovery can cope with tighter policy.

Investors have essentially settled on what the central bank will do. Swap pricing points to a 98% likelihood that the BOJ will take its policy rate to 1.25% via a 25 basis-point increase at next week's meeting, and a further rise to 1.5% is completely priced for January. The BOJ raised rates to 1% in June, the highest in 31 years, but has faced continuing pressure to tighten further because of price pressures connected to the Middle East conflict and the softer yen. With the upcoming hike now close to a foregone conclusion, the focus is moving to how the bank characterises the risks of the conflict and of its past tightening as it weighs what comes after September, and that framing is likely to matter more to the yen and Nikkei than the rate decision itself.