Japan's economy grows 1.1% annualised in Q2, missing forecasts as consumption stalls
Japan's economy expanded at an annualised 1.1% in April-June, below the 2.0% forecast, as flat private consumption and falling capital spending offset resilient exports and rising government outlays.
GDP growth slows
Japan's economy expanded at an annualised 1.1% in the April-June quarter, the Cabinet Office reported on Monday, falling short of the median market forecast of 2.0% growth. The quarterly rise of 0.3% also missed the 0.5% estimate from analysts polled by Reuters and marked a slowdown from the upwardly revised 0.5% growth recorded in the first quarter. The figure still extended Japan's growth streak to three consecutive quarters. A separate survey of 37 economists by the Japan Center for Economic Research had forecast annualised expansion of 1.67%.
Weak consumption and investment
Private consumption, which accounts for more than half of economic output, was flat in real terms, missing the market estimate of a 0.5% increase. According to Jiji Press, the reading represented the first negative quarter for consumption in eight quarters, pressured by lower tobacco sales following price hikes for heated tobacco products and reduced electricity consumption for heating due to higher temperatures. Consumption was partly supported by stronger vehicle sales after the abolition of the environmental performance tax on automobile purchases and last-minute demand for air conditioners ahead of stricter energy-saving standards taking effect in April 2027.
Capital spending fell 1.2%, declining for the second consecutive quarter, reflecting reduced spending on research and development services following patent transfers abroad by pharmaceutical companies. The drop contrasted with a market forecast of a 0.4% increase.
- Private consumption
- 0 %
- Capital spending
- -1.2 %
- Government spending
- 1.6 %
- Public investment
- -0.1 %
- Exports
- 0.5 %
- Imports
- -1.5 %
External demand and government spending
Net external demand added 0.5 percentage points to GDP growth, as exports rose 0.5% while imports fell 1.5%. Exports remained resilient thanks to solid US demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence supporting shipments of semiconductor-related equipment. The import decline partly reflected reduced oil imports from the Middle East amid deteriorating conditions around Iran and traffic disruptions in the Strait of Hormuz.
Government spending rose 1.6% for the fifth consecutive quarter, driven by higher medical expenses following revisions to medical service fees, an expansion of free high school tuition, and the introduction of free school lunches at public elementary schools. Public investment fell 0.1%, the first decline in two quarters. In nominal terms, GDP rose 1.2% quarter on quarter, for an annualised increase of 4.8%.
Yen pressure and BOJ outlook
The weaker-than-expected figures complicate the Bank of Japan's upcoming rate decision in September. The BOJ raised its benchmark interest rate to 1% in June, its highest in more than three decades, as part of its push to normalise monetary policy after decades of ultra-low and negative borrowing costs. The central bank began moving away from ultra-loose policy in 2024 with its first rate hike since the 2008 global financial crisis.
- BOJ announces first rate hike since the 2008 global financial crisis
- BOJ raises benchmark rate to 1%, highest in more than three decades
- Yen hits 40-year low against the US dollar before joint US-Japan intervention
- Q2 GDP released: 0.3% quarterly, 1.1% annualised, below 2.0% forecast
The yen hit a 40-year low against the US dollar last month before a joint intervention by the United States and Japan to support the currency. Japan imports almost all of its crude oil needs, leaving it exposed to elevated energy costs stemming from the fallout of the US-Israel war on Iran. Inflation excluding fresh food accelerated to 1.6% year on year in June.
Analyst reactions
Taro Saito, an economist at the NLI Research Institute, told AFP that growth was driven not by economic strength but by falling imports.
The GDP figures are worse than expected. Both consumption and investment are weak.
Taro Kimura of Bloomberg Economics noted that while GDP grew above potential, the details weakened the case for a September rate hike.
Japan's GDP grew in the second quarter at a pace above its potential, but the detail of the figures weakens the argument for a rate hike by the Bank of Japan as early as September, a prospect increasingly priced in by markets.
Norihiro Yamaguchi, lead economist for Japan at Oxford Economics, said he expected growth to remain sluggish in the second half of 2026 as companies pass rising energy costs on to consumers.
Although AI-related goods exports will continue to stay robust in the near term, sluggish non-AI-related global economic activities will limit overall export gains.
A survey this month by the Japan Center for Economic Research showed 37 economists forecasting annualised GDP growth to slow to an average of 0.05% in the July-September quarter. Japan's stock market rose on Monday, with the Nikkei 225 up 0.3% as of 05:15 GMT, while South Korea's KOSPI gained 2.4% and Hong Kong's Hang Seng Index rose 1.6%.
