Japan's economy rebounds strongly on consumption boost

TOKYO, Aug 15 (Reuters): Japan's economy expanded by a much faster-than-expected annualised 3.1 per cent in the second quarter, rebounding from a slump at the start of the year thanks to a strong rise in consumption and backing the case for another near-term interest rate hike.

The Bank of Japan had forecast that a solid economic recovery will help inflation sustainably hit its 2 per cent target, and justify raising interest rates further after it hiked them last month in its continued quest to exit years of massive monetary stimulus.

The increase in gross domestic product (GDP) compared with a median market forecast for a 2.1 per cent gain, and followed an upwardly revised 2.3 per cent contraction in the first quarter, government data showed on Thursday.

The reading translates into a quarterly rise of 0.8 per cent, beating a 0.5 per cent increase expected by economists in the Reuters' poll.

"The results are simply positive overall, with signs for a pick-up in private consumption backed by real wage growth," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

"It supports the BOJ's view and bodes well for further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the yen."

Private consumption, which accounts for more than half of the economic output, rose 1.0 per cent, compared with forecast for a 0.5 per cent increase and the first gain in five quarters.

Private consumption has been a soft spot in the economy, which has stuttered over the past year as households struggle with rising living costs, blamed in part on higher import prices due to the weak yen.

Public discontent over rising living costs was one of the factors that prompted Japan's Prime Minister Fumio Kishida to announce he would resign next month.

Kishida's replacement could call a snap election in the fall if the approval rating is high, said Kengo Tanahashi, economist at Nomura Securities, adding that the BOJ is unlikely to opt for an additional rate hike during that period.

"We believe that the BOJ will raise interest rates one more time in October or December, but the possibility of a rate hike in October has decreased considerably in light of Prime Minister Kishida's decision not to run for office," Tanahashi said.