Japan GDP revision cements BOJ hike bets, yen and Nikkei in focus

The revision itself was a modest beat against the preliminary figure but a miss against the median forecast, which is arguably the more useful signal here: growth held up reasonably well through a quarter when Middle East disruption could plausibly have done more damage, and that resilience is exactly what the BOJ needs to justify hiking without appearing to risk the recovery. With swap markets already pricing a 98% chance of a move to 1.25% next week and a further hike to 1.5% fully priced by January, the GDP print is unlikely to shift near-term rate expectations much further, but it removes one of the last data-dependent objections to proceeding. For the yen, that combination of confirmed hike and a clear path beyond it is broadly supportive, particularly against a backdrop of yen weakness the BOJ has cited as a pressure point. The Nikkei read is more mixed: the growth and wage story supports the domestic demand and earnings narrative, but further upward pressure on JGB yields as the hike path firms remains a headwind for rate-sensitive sectors, leaving exporters as the more likely relative outperformer through the decision.--- The GDP revision wasn't a blowout, but it was resilient enough to remove the BOJ's last excuse for delay.Summary:Japan's Q2 GDP was revised up to an annualized 1.4% from the preliminary 1.1%, though it fell short of economists' median forecast of around 1.6-1.8%On a non-annualised basis, GDP grew 0.4%, matching the median forecast and above the preliminary 0.3% readingCapital expenditure fell 0.9%, an upward revision from the initial 1.2% drop but a slightly faster decline than the 0.8% forecast, reflecting capex data showing plant and equipment spending up 1.6% year-on-yearPrivate consumption was flat, matching the preliminary reading, while external demand added 0.5 percentage point to growth and domestic demand's drag narrowed to 0.1 percentage point from 0.2%Separately released data showed July real wages rose 2.4% year-on-year, the biggest gain since May 2021 and a seventh straight month of increasesSwap rates imply a 98% chance of a 25bp BOJ hike to 1.25% at the September 18 meeting, with a further hike to 1.5% fully priced by January, according to Tokyo Tanshi Japan's economy grew faster than initially estimated in the second quarter, reinforcing market expectations that the Bank of Japan will raise interest rates at its September 18 policy meeting. Revised Cabinet Office data released Tuesday showed GDP expanded at an annualised 1.4%, up from the preliminary estimate of 1.1%, though it still fell short of economists' median forecast, which had ranged from around 1.6% to 1.8% across surveys. On a quarterly basis, GDP grew 0.4%, matching the median forecast and improving on the preliminary 0.3% reading.The upward revision was driven largely by capital expenditure, which fell 0.9% in the quarter, an improvement on the initial estimate of a 1.2% decline, reflecting capex data released last week that showed Japanese firms lifted spending on plant and equipment by 1.6% year-on-year. Private consumption, which accounts for more than half of the economy, was flat, unchanged from the preliminary reading. External demand added 0.5 percentage point to growth, unchanged from the initial data, while the drag from domestic demand narrowed to 0.1 percentage point from 0.2% previously.Kento Minami, senior economist at Daiwa Securities (via Reuters report), said the fact that growth held up around this level was notable given that the April-June quarter was a period when the Middle East situation could have exerted meaningful downward pressure on the economy, adding that the data leaves no reason to worry about growth and clears the way for the BOJ to proceed with a rate hike. That view aligns with separate wage data also released Tuesday showing July real wages rose 2.4% year-on-year, the biggest increase since May 2021 and a seventh consecutive month of gains, adding further support to the case that Japan's wage-led recovery is durable enough to withstand tighter policy.Markets have all but finalised their pricing on the outcome. Swap rates imply a 98% probability that the BOJ will raise its policy rate by 25 basis points to 1.25% at next week's meeting, with a further hike to 1.5% fully priced in by the January meeting. The BOJ lifted its policy rate to a 31-year high of 1% in June but has remained under pressure to tighten further amid price pressures stemming from the Middle East conflict and a weaker yen. With the hike itself now essentially a formality, investor attention is shifting to how the central bank frames the risks from the ongoing conflict and its past tightening as it assesses the path beyond September, a distinction likely to matter more for the yen and Nikkei than the decision itself. This article was written by Eamonn Sheridan at investinglive.com.