The strong rebound in the second quarter of the economy has given the Bank of Japan more confidence to raise interest rates again!

Thanks to strong growth in consumption, the Japanese economy rebounded from the early year slump, with second-quarter GDP annualized at 3.1%, well above expectations, providing support for the recent rate hike by the Bank of Japan.

The Bank of Japan had predicted that a robust economic recovery would help sustain the inflation rate at the 2% target, which was one of the reasons for the recent rate hike following last month's hike as part of the continued move to exit the years-long massive monetary stimulus policy.

Government data on Thursday showed that Japan's second-quarter GDP annual growth rate exceeded the market's median forecast of 2.1%, indicating a quarter-on-quarter growth of 0.8%, higher than the 0.5% expected by economists surveyed by Reuters.

Kazutaka Maeda, an economist at the Meiji Yasuda Research Institute, said, "Overall, the data is positive, with signs of a rebound in private consumption supported by real wage growth. This supports the view of the Bank of Japan as a good sign for further rate hikes, although the bank will remain cautious as the last rate hike led to a sharp rise in the yen."

Private consumption, which accounts for more than half of economic output in the second quarter, grew by 1%, higher than the expected 0.5%, marking the first growth in five quarters.

Marcel Thieliant, Director of Asia-Pacific at Capital Economics, believes that the first growth in consumption in over a year "should encourage the Bank of Japan to hike rates again later this year."

Japan's economy rebounded strongly in the second quarter

Private consumption has always been a weak point in the Japanese economy. Over the past year, due to continuously rising household expenses (partly attributed to the weak yen leading to higher import prices), private consumption has been stagnant.

Public dissatisfaction with rising living costs was also one of the factors prompting Japanese Prime Minister Fumio Kishida to announce his resignation next month.

Kengo Tanahashi, an economist at Nomura Securities, said, "Basically, we expect consumption to continue to recover. In addition to the scheduled tax cuts starting in June and the subsidies for electricity and gas bills starting in August, there was a significant push in this year's spring wage negotiations, and we believe that the increase in income will promote consumption."

The influx of a large number of tourists has also boosted the development of Japan's retail industry. Fast Retailing, the parent company of clothing brand Uniqlo, emphasized in its recent financial report that the domestic market in Japan performed strongly, boosted by the surge in sales at duty-free stores.

The Japanese government views tourism as an important driver of its long-term economic growth affected by an aging population, expecting tourist spending to reach 8 trillion yen (54.74 billion US dollars) this year.

Capital expenditure is a key driver of economic growth led by private demand, with capital spending growing by 0.9% in the second quarter, in line with the market's median forecast from Reuters' opinion poll. The data also showed that external demand (exports minus imports) dragged economic growth down by 0.1 percentage point The Bank of Japan raised interest rates last month and detailed plans to reduce its massive bond purchases, marking another step towards gradually exiting its large-scale monetary stimulus policy.

As most major central banks, including the Federal Reserve, have begun to ease policies or move in that direction, the Bank of Japan appears out of step with its global peers