Japan’s economy cools, but rate hikes are still very much on the table

Japan’s economy grew for a second straight quarter, but don’t start celebrating just yet. The pace slowed, thanks to summer’s typhoons and an earthquake warning that kept people indoors and cautious.

Preliminary government data dropped on Friday, confirming a modest 0.2% bump in GDP from July to September compared to the previous quarter. Economists had guessed this figure right, but it’s still a tier below the 0.5% growth seen between April and June.

The Bank of Japan (BoJ) isn’t panicking. Officials see the economy steadily improving, even with some bumps along the way. Inflation remains on track, and Governor Kazuo Ueda has hinted that rate hikes could be coming soon. A weaker yen, which is inflating import costs, has economists and policymakers on edge.

Consumers spend, but natural disasters kill Japan’s buzz

Private consumption—the heart of Japan’s economy—rose 0.9% during the quarter. People had more money to spend, thanks to summer bonuses and a one-time tax cut. These boosts gave families extra cash, which should have gone straight to stores and restaurants. But then nature stepped in, and typhoons, along with an earthquake warning, kept wallets shut and foot traffic low.

Price sensitivity remains deeply ingrained, and no one knows if higher paychecks will translate into a long-term spending spree.

Meanwhile, capital expenditure—business investments in things like machinery and factories—slipped by 0.2%. Overseas demand is another headache, with slower global economies putting pressure on Japan’s export-heavy industries. Yet, there’s hope that inbound tourism and labor-saving technologies will keep the economy from stalling.

Annualized GDP growth came in at 0.9%, which is a projection of what the full year might look like if it maintains its current pace. It’s not terrible, but those numbers don’t inspire confidence either.

The fate of the markets

On August 5, the BoJ raised its policy interest rate from 0% to 0.25%. It was the second rate hike of the year and a big move for a central bank that has spent decades fighting low inflation with loose monetary policies.

Markets immediately freaked out. Stocks tanked, currencies swung wildly, and crypto traders had a meltdown. The Nikkei 225 Index suffered its worst single-day drop since 1987’s Black Monday, falling 12%. Investors panicked, fearing that higher borrowing costs would crush profits and consumer spending.

The carnage spread globally. The S&P 500 fell more than 5% on the same day in the U.S., as traders braced for higher interest rates everywhere.

Currency markets were no less dramatic. The yen surged against the dollar, with the USD/JPY exchange rate dropping from 153 to 145 yen per dollar. That might sound like a win for Japan, but it wasn’t.

A stronger yen makes Japanese exports more expensive and eats into profits for companies relying on international sales. It also makes yen-denominated loans pricier, killing off carry trades that depend on cheap borrowing.

Then there was the crypto chaos. Bitcoin and Ethereum took massive hits, with prices dropping 18% and 26%, respectively. Bitcoin fell from $55,514 to $45,000, while Ethereum nose-dived to $2,500 in literal minutes. It was crazy to watch.

Leverage was the culprit. Traders borrowing in yen got crushed as the cost of loans shot up, forcing mass sell-offs. Margin calls hit hard, wiping out positions and adding fuel to the fire.

That’s probably what will happen again if it hikes rates by too much. Not even President Donald Trump will be able to save our bags, especially if the Federal Reserve also decides not to cut rates again this year.

Trump’s policies will actually disrupt global trade. Remember the tariffs on China during his first term? Those hit Japanese manufacturers hard because they supply parts for Chinese goods exported to the U.S.

Despite all this, the BoJ remains focused. But hope isn’t a strategy, and Kazuo Ueda knows it. For now, rate hikes are still on the table, whether the markets like it or not.