Japan GDP growth slows to 1.1% as consumption and investment stall

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Japan GDP growth slows

Highlights

Japan's GDP grew at an annualized 1.1%, below the 2% forecast.
Quarterly growth reached 0.3%, missing expectations for 0.5%.
Net exports added 0.5 percentage point to economic growth.
Private consumption was flat, and business investment fell 1.2%.

Gross domestic product grew at an annualized 1.1% rate in April through June, below expectations for 2% growth and down from the previous quarter, CNBC writes. On a quarter-to-quarter basis, GDP increased 0.3%, also missing the 0.5% forecast. The economy was 0.7% larger than a year earlier.

Exports keep growth above water

External demand provided most of the quarter’s momentum. Net exports added 0.5 percentage point to GDP as overseas shipments remained comparatively resilient, supported by demand for Japanese hybrid vehicles and semiconductor-related equipment tied to global AI investment.

The weak yen also improved the competitiveness of Japanese exporters and raised the value of overseas earnings. But the same currency weakness has made imported energy and other raw materials more expensive, increasing costs for businesses and households.

Domestic demand subtracted 0.2 percentage points from growth. Private consumption, which represents more than half of Japan’s economy, was flat, while business investment fell 1.2% from the previous quarter instead of posting the expected increase.

Government oil-reserve releases aimed at cushioning the impact of disrupted Middle East energy supplies also reduced public inventories, weighing on the domestic-demand component.

Weak demand complicates the BOJ outlook

The figures leave the Bank of Japan with a difficult policy mix. Economic activity is still expanding, but the composition of growth shows that households and companies are becoming more cautious just as higher energy and import costs threaten to keep inflation elevated.

The BOJ recently raised its growth forecast for the fiscal year ending March 2027 to 0.6% from 0.5%, while warning that expensive crude oil could slow the economy. Any further increase in costs passed through by businesses could weaken household purchasing power and restrain consumption later this year.

Markets reacted modestly to the GDP release. The Nikkei 225 gained about 0.69%, the 10-year Japanese government bond yield stood near 2.88%, and the yen strengthened slightly to around 159.1 per dollar.

The larger issue is whether export strength can continue carrying an economy with little momentum at home. If consumption remains soft while energy-driven inflation persists, the BOJ will have less room to tighten policy without adding another drag on growth.

As we previously reported, the U.S. and Japan jointly intervened to support the yen for the first time since 1998.

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