Japan’s economy has recently shown promising signs of recovery, with the government announcing stronger-than-expected growth in the second quarter of 2024. The latest data reveals that the country’s gross domestic product (GDP) expanded at an annualised rate of 2.9% during this period, a figure slightly below the initial estimate of 3.1% but still marking a substantial improvement compared to previous months. On a quarterly basis, the GDP grew by 0.7%, reflecting a much more optimistic outlook after a prolonged period of economic stagnation.
At the same time, the Japanese yen has been gaining strength. On 13th September, the yen reached its highest level of 2024, hitting 140.67 yen per US dollar. Just a few days earlier, on the 11th of September, it had peaked at 140.72 yen per dollar, following a statement from Junko Nakagawa, a policymaker at the Bank of Japan. She mentioned that any decision to raise interest rates would be closely tied to forthcoming economic data. This sentiment, coupled with the increasing likelihood that the US Federal Reserve will reduce interest rates by 0.5 percentage points at their upcoming meeting, has fuelled further optimism for the yen. As experts note, this would narrow the interest rate gap between the US and Japan, which has historically weakened Japan’s currency.
Analysts are predicting that the yen may strengthen even further in the coming weeks. With key US retail sales data expected ahead of the Federal Reserve’s meeting, there is speculation that the yen could climb to 138 yen per US dollar. Such developments are seen as a clear sign that Japan’s economy is on the road to recovery, despite some remaining challenges.
Although Japan’s growth was slightly slower than the initial government estimate, it remains robust enough for the Bank of Japan to consider maintaining its policy of gradual interest rate hikes later this year. Kazuo Ueda, the Governor of the Bank of Japan, has expressed confidence that the economy will continue on its current upward trajectory. Growth for the third quarter of 2024 is forecast at 1.7%, surpassing the Bank’s previous highest estimate of 1%.
Nevertheless, not all experts share this optimistic outlook. Some remain cautious about the recovery of household consumption, which has been held back by stubborn inflation. Japan’s consumer inflation rate has remained at or above the Bank of Japan’s 2% target for the past 28 months, and although wages have recently stabilised after more than two years of decline, consumer spending is still below pre-pandemic levels.
Before these recent positive indicators, Japan’s economy had faced a series of difficulties. In mid-May, the government reported that real GDP in the first quarter of 2024 had declined by 2% compared to the same period the previous year. This marked the first contraction in two quarters, with real GDP also falling by 0.5% from the previous quarter. The beginning of 2024 had been particularly challenging due to a combination of domestic factors, including high inflation, and external issues such as the temporary halt in exports from Daihatsu Motor Co., following a vehicle inspection fraud scandal. Furthermore, global challenges such as the ongoing conflicts in the Middle East and disruptions to supply chains added to the nation’s economic woes.
Now, with inflation gradually being brought under control and growth beginning to recover, Japan’s economic outlook is improving. This resurgence comes at a time when other major economies are also showing signs of stabilisation. The US, China, and the European Union are all experiencing better-than-expected growth, contributing to a brighter global economic picture for 2024.
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