Japan: Weak Demand Raises Doubts Over BoJ Path—Société Générale

Japan's latest second-quarter GDP data came in weak, with both consumption and capital expenditure missing expectations, fueling fresh market doubts over the pace of the Bank of Japan's monetary policy normalization. Société Générale economists Reo Sakeda and Susumu Kanasaki noted in a report that the sluggish domestic demand complicates the central bank's trade-offs when considering further policy tightening.

**Weak Domestic Demand Constrains Tightening Space**

Looking at the breakdown, private consumption, which holds the largest weight in Japan's economy, remained lackluster, while corporate capital expenditure failed to sustain its earlier improvement trend. This suggests that the sustainability of Japan's economic recovery still lacks sufficient endogenous momentum. Against this backdrop, overly rapid rate hikes by the central bank could further suppress the already fragile domestic demand recovery. The SocGen economists believe this data mix reinforces the case for the BoJ to stay on hold in the near term.

**Policy Path Faces Dilemma**

Markets had previously speculated that the BoJ might accelerate rate hikes to complement currency intervention and support the yen. However, SocGen's rate strategy analysts pointed out in the report that, historically, Japanese authorities have often viewed currency intervention as a way to slow the pace of monetary tightening rather than a reason to accelerate hikes. The bank projects the BoJ will hold steady at its September meeting and hike by 25 basis points in October, bringing the policy rate to 2% by the fourth quarter of 2027. The report also noted that if USD/JPY approaches 165 before the September meeting, the likelihood of a September hike would rise.

**Key Points to Watch**

Current money markets price in a 10 basis point hike by the BoJ in September and a 21 basis point hike by October, showing some divergence from SocGen's view. Over the coming months, whether consumption and capital expenditure can stabilize and recover, along with how the yen exchange rate evolves, will be key variables in tracking the BoJ's policy path.