Japan GDP Grows 1.1% in Q2, Missing Forecasts

Japan's economy grew at an annualized rate of 1.1% in the second quarter ending June 30, missing economist forecasts of 2%. This represents a deceleration from the previous quarter's pace, which ranged between 1.9% and 2.1%. The slowdown was driven by a 1.2% drop in capital expenditure and flat or slightly declining private consumption, which fell 0.02% in its first decline in eight quarters.

Domestic weakness resulted from inflation, rising living costs, and supply chain disruptions linked to conflict in the Middle East. The government also released national oil reserves to manage energy prices, creating a drag on public inventories. Conversely, net exports contributed 0.5 percentage points to growth, fueled by strong U.S. demand for hybrid vehicles and global investment in artificial intelligence infrastructure.

Sanae Takaichi, Prime Minister of Japan, responded with expansionary fiscal policies, including utility cost subsidies and a plan to reduce the food sales tax from 8% to 1% starting in April. These measures, alongside high oil import costs, have pressured the yen and pushed 10-year government bond yields to their highest levels since 1996.

The Bank of Japan marginally raised its fiscal year 2026 GDP growth outlook to 0.6%. While weak domestic demand complicates policy, market traders and economists suggest a benchmark interest rate hike remains possible during the September 18 policy meeting, though the central bank may adopt a more gradual tightening pace.