Japan’s economy expanded just 1.1% on an annualized basis in the second quarter, well short of the roughly 2% growth economists had forecast and a sharp deceleration from the revised 1.9% pace in the first quarter. Quarter-on-quarter growth came in at 0.3%, missing the 0.5% analysts expected, marking the country’s third straight quarter of expansion.
Weak domestic demand, which subtracted 0.2 percentage points from growth, did most of the damage. Private consumption, more than half of Japan’s economy, was flat against a forecast for 0.5% growth, and business investment fell 1.2% from the prior quarter, a sharp reversal from the modest gain economists had expected.
Exports were the bright spot, adding 0.5 percentage points to growth and beating forecasts in every month of the quarter, though the gain reflected a weak yen more than real growth in shipment volumes. Imports fell 1.5% as the Strait of Hormuz’s effective closure disrupted crude oil shipments.
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The Iran war’s toll on Japan’s economy showed up in full this quarter. Businesses and households pulled back as energy costs climbed, and a government drawdown of national oil reserves to cushion the shock further dented domestic demand.
The soft print complicates the Bank of Japan’s path toward further rate increases. The central bank held its policy rate at 1% in late July, an 8-1 decision in which one board member pushed for a hike to 1.25%, while warning core inflation could run well above its 2% target later this fiscal year. Earlier this month, the BOJ said its economy was “expected to continue growing moderately, albeit at a decelerated rate,” citing high crude prices tied to the Middle East conflict as a drag, partly offset by government measures to cushion households and rising AI-related semiconductor demand.
Price pressure hasn’t eased either. The GDP deflator, a broader price gauge, climbed 2.6% from a year earlier, leaving policymakers caught between soft growth and inflation that hasn’t cooled.
However, investors shrugged off the disappointment. Japan’s Nikkei 225 climbed 0.43% in the session, the yield on 10-year government bonds barely moved, holding at 2.88%, and the yen firmed marginally to roughly 159 per dollar.
