Japan’s second-quarter GDP rises 1.1% annually, falling short of expectations
Japan’s economy recorded a growth of 1.1% on an annualized basis in the second quarter of the fiscal year, falling short of the anticipated 2% growth figure. This expansion came after a stronger performance of 2.1% in the previous quarter. The slowdown in expected growth has been attributed to a decrease in domestic demand, which counterbalanced a significant increase in exports.
The latest data represents the first complete quarter affected by the ongoing conflict in Iran, which has notably increased energy prices and impacted both businesses and households across the nation. In response to the economic indicators, the Nikkei 225 index experienced a modest increase of 0.43%. Furthermore, the yield on benchmark 10-year Japanese Government Bonds stabilized at 2.88%, while the yen appreciated slightly against the dollar, trading at 159.1.
Exports emerged as a critical driver of the nation’s economic activity, surpassing expectations throughout the quarter. However, analysts have pointed out that this uptick was predominantly influenced by the weaker yen rather than a significant surge in the volume of goods shipped. In comparison to the previous quarter, Japan’s GDP rose by 0.3%, a figure that fell short of the projected 0.5% growth. While exports contributed positively to the GDP, domestic demand exerted a downward pressure, reducing growth by 0.2 percentage points.
Notably, domestic demand was impacted by a reduction in public inventories, particularly attributed to the government’s release of national oil reserves as a measure to mitigate the effects of rising energy costs due to the Middle East conflict. In addition, there was a decline in consumption of non-durable goods and service sectors, compounded by deteriorating consumer sentiments. Business investment also experienced a contraction on a quarterly basis.
On a year-over-year basis, the economy grew by 0.7%, a modest improvement from the 0.5% recorded in the first quarter. Earlier assessments from the Bank of Japan indicated a slight upward revision in its GDP growth forecast for the fiscal year 2026, adjusting it to 0.6% from an earlier estimate of 0.5%. The central bank has indicated that while moderate growth is anticipated, it will occur at a decelerated rate due to persistent high crude oil prices stemming from external conflicts.
Analysts express caution regarding inflationary pressures in the latter half of the year, warning that as companies begin passing on rising costs to consumers, purchasing power may diminish further. Amidst these challenges, the Japanese economy must navigate a delicate balance of external influences and domestic policy measures aimed at addressing rising costs and stimulating growth.
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