Japan’s downgraded growth complicates rate hike path

Japan’s first-quarter GDP was downgraded on Monday, and the service-sector business sentiment worsened in June due to concerns about increasing costs.

Despite this, firms plan to increase capital expenditure and expect inflation to remain around the Bank of Japan’s (BOJ) two per cent target, keeping expectations of a rate hike alive.

The findings complicate the BOJ’s decision on when to raise interest rates ahead of its July meeting. While business sentiment may have peaked, corporate inflation expectations have slightly increased, supporting the case for a near-term rate hike.

Big manufacturers’ sentiment improved, with plans to increase capital expenditure and rising output prices. Long-term corporate inflation expectations also rose slightly, supporting the BOJ’s normalisation of monetary policy.

Attribution: Reuters