Japan's economy contracted more than initially estimated in Q3, revised data showed, marking the first decline in six quarters and reinforcing the case for additional economic stimulus.
Government data released Monday revealed GDP shrank at an annualized rate of 2.3% in Q3, worse than the preliminary estimate of a 1.8% decline and slightly below the median forecast of 2%. The contraction—the first in six quarters—was primarily driven by weaker-than-expected business spending.
Following the release, the yield on 10-year Japanese government bonds (JGBs) edged lower, though it later rose to 1.953%. The 20-year JGB yield climbed 2.4 basis points to 2.946%. Earlier, JGB yields had surged on growing market expectations of a near-term Bank of Japan (BOJ) rate hike.
Economists attributed Q3's weakness largely to a temporary slump in housing investment due to regulatory changes. However, the result is unlikely to alter the BOJ's stance on further rate hikes, as inflation persists and trade-related uncertainties ease.
**Capital Spending Misses Expectations**
Revised figures painted a mixed picture of Japan's economic components. Business spending fell 0.2% quarter-on-quarter, contrasting with the preliminary estimate of a 1.0% increase. Private consumption was revised upward to 0.2% growth from the initial 0.1% reading.
Separate data showed real wages in October fell 0.7% year-on-year—the 10th consecutive monthly decline. Nominal wages rose 2.6%, with base pay growing at the same pace, signaling sustained wage momentum. However, wage growth still trails inflation, which has remained at or above the BOJ's 2% target for over three and a half years—the longest streak since the early 1990s.
Investors are closely monitoring economic data and any progress on Prime Minister Sanae Takaichi's stimulus measures ahead of the BOJ's policy meeting next week.
**BOJ Rate Hike Path Unshaken**
Despite weak data, markets expect the BOJ to maintain its tightening bias. Over the past week, traders have priced in the possibility of a December rate hike.
BOJ Governor Kazuo Ueda recently stated the central bank would weigh the pros and cons of raising rates at its upcoming meeting. Factors supporting further hikes include persistent inflation and reduced trade uncertainty.