The latest data from Japan has revealed a complex picture of its economic landscape, particularly in the context of potential interest rate hikes by the Bank of Japan (BOJ). For the third quarter of 2023, Japan's GDP grew at an annualized rate of 1.2%, which surpasses the preliminary estimate of 0.9%. This upward revision has sparked discussions among economists and policymakers alike regarding the future trajectory of monetary policy, especially with a December meeting on the horizon where interest rates could be deliberated.

One noteworthy aspect of this growth is the significant upward revision in capital investment and export figures, which has contributed to the country's accelerating economic performance from July to SeptemberHowever, the increase in growth does not come without its caveats; consumer spending figures were revised down, signaling underlying weaknesses in the economic recovery

Analysts have pointed out that the resilience of the Japanese economy is still tentative, leaving many to question the sustainability of this positive momentum.

According to the newly released adjusted figures from Japan's Cabinet Office, real GDP increased by 0.3% on a quarter-on-quarter basis after accounting for inflation, up from an initial figure of 0.2%. This improvement was supported by capital expenditure, which saw a smaller-than-anticipated decline of only 0.1%, compared to the initial estimate of a 0.2% dropInterestingly, external demand's drag on growth was assessed to be less severe than previously thought, with its contribution dropping from a projected 0.4% to 0.2%. However, private consumption, which represents over half of Japan's economy, posted a growth rate of just 0.7%, below the earlier estimate of 0.9%. This could reflect a consumer sentiment that is still fragile, amidst rising prices and cost-of-living concerns.

The BOJ is set to hold its next policy meeting on December 18-19, and the recent economic data will likely inform any discussions around interest rate adjustments

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Economists, such as Uichiro Nozaki from Nomura Securities, suggest that while the latest figures do not significantly bolster expectations for an imminent rate hike, they also do not present major obstacles to such a decisionThere is a underlying sense that Japan's economic performance, while improved, is not robust enough to justify aggressive policy action.

Historically, Japan's central bank has navigated through a prolonged period of ultra-loose monetary policy due to persistent deflationary pressuresBeginning in March 2023, the BOJ embarked on a gradual exit strategy from nearly a decade of aggressive stimulus measures, which culminated in a short-term interest rate hike to 0.25% in JulyBOJ Governor Kazuo Ueda has indicated that if inflation can be sustained around the target rate of 2%—supported by wage growth and strong domestic demand—the central bank would actively prepare for future rate hikes to further stabilize Japan's macroeconomic framework.

Despite these developments, market sentiment remains cautious

The prospect of increased tariffs from the United States poses an external risk that could adversely impact Japanese exportersCompanies that rely heavily on overseas markets may face rising costs, decreased competitiveness, and potentially shrinking profit margins, leading to cutbacks in investment and possible job lossesAdditionally, if consumer confidence dips due to a negative economic outlook, domestic spending could wane, posing significant challenges for various sectorsAccording to Masato Koike, a senior economist at the Sompo Institute Plus, while real wage growth could provide some support for consumption, sluggish overseas growth will suppress recovery in external demand, leading to an overall modest recovery for Japan’s economy.

Looking ahead, many market participants anticipate that the BOJ could implement another interest rate increase before the end of the fiscal year in March 2024. However, disagreement persists regarding whether this action will occur in December or during the early months of the next year