Japan's economy grows 1.1% annualized in Q2, missing forecasts as consumption stalls

GDP growth slows in Q2

Japan's economy expanded at an annualized 1.1% in the April-June quarter, preliminary government data released Monday by the Cabinet Office showed, falling short of market forecasts. A Reuters poll had projected 2.0% annualized growth, while a Jiji Press survey of 17 think tanks put the median estimate at 2.1%. The quarterly rise was 0.3%, below the 0.5% median estimate. In nominal terms, GDP rose 1.2% quarter on quarter, for an annualized increase of 4.8%. The real GDP reading followed an upwardly revised 1.9% annualized expansion in the previous quarter, extending Japan's growth streak to three consecutive quarters.

Consumption and investment weaken

Private consumption, which accounts for more than half of economic output, was flat in the second quarter, missing a market estimate of a 0.5% increase. Higher raw material costs and supply disruptions linked to the Middle East war weighed on household spending. Capital spending, a key driver of private demand, fell 1.2% in the quarter, against a forecast 0.4% increase, as uncertainties stemming from the Middle East conflict depressed business investment.

Exports cushion the slowdown

Net external demand, or exports minus imports, added 0.5 percentage point to growth. Exports remained resilient, supported by solid US demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence that boosted shipments of semiconductor-related equipment and components. Exports in June grew 19.3% year-on-year, their fastest pace since November 2022, driven by semiconductor equipment sales and the weak yen. The yen had fallen to its lowest levels in 40 years against the dollar before a recent joint intervention by the United States and Japan to support the currency. The weakened yen has benefited Japanese exporters by making them more competitive internationally.

Inflation and policy response

Core inflation, excluding fresh food, accelerated to 1.6% year-on-year in June, fueled by surging energy prices as Japan remains heavily dependent on hydrocarbon imports. Prime Minister Sanae Takaichi's government adopted new aid measures in spring to support household consumption, following a massive relief plan adopted in late 2025 and broad energy tax breaks. Takaichi announced in late July that the government would cut the food consumption tax from 8% to 1% starting in April.

Taro Kimura of Bloomberg Economics observed before the data release that rising real wages and lower fuel taxes had probably supported household consumption.

The rise in real wages and the reduction in fuel taxes probably supported household consumption.

He also noted that the economy had resisted well despite crude oil supply disruptions linked to the conflict involving Iran.

BOJ and outlook

Consumption and wage trends are key factors the Bank of Japan is monitoring to gauge economic strength and determine the need for additional rate hikes. Handelsblatt reported that the BOJ is apparently planning a rate hike, with the yen gaining.

Analysts warned that rising import costs and mounting price pressures could feed through to consumers, posing a risk to spending later in the year. Private consumption could see a pullback in the July-September quarter after policy and regulatory changes temporarily boosted demand for durable goods such as automobiles and air conditioners in April-June. A survey this month by the Japan Center for Economic Research showed 37 economists forecasting annualized GDP growth to slow to an average 0.05% in the July-September quarter.