Japan's economy grows 1.1% in Q2, but misses market expectations

Japan's economy grew 1.1% in Q2, marking a second consecutive quarter of expansion but missing forecasts. Growth was hit by weak business investment and household spending, linked to the fallout from the West Asia conflict.

Japan's economy grew at an annualised 1.1 per cent in April-June, marking a second consecutive quarter of expansion, but fell short of the 2.0 per cent market expectation as the fallout from the West Asia conflict weighed on business investment and household spending, government data showed on Monday.

On a quarter-on-quarter basis, gross domestic product rose 0.3 per cent, below the 0.5 per cent forecast as a 0.5 percentage-point boost from exports was partly offset by a 0.2 percentage-point drag from weaker domestic demand. On a year-on-year basis, the country's economy expanded 0.7 per cent, up from 0.5 per cent in the first quarter.

Key Drags on Growth

Capital spending emerged as the biggest drag, contracting 1.2 per cent during the quarter against market expectations of a 0.4 per cent increase, following a 1 per cent decline in the previous quarter. On the other hand, private consumption, which accounts for more than half of Japan's economic output, was also weak as households remained cautious amid a rising cost of living.

External Pressures and Trade Impact

The weakness in domestic demand comes as the conflict in the Middle East pushed up energy prices and raised uncertainty for businesses and consumers. Notably, April-June was the first full quarter to capture the economic impact of the Iran conflict.

Japan's trade data had earlier highlighted the impact of the conflict, with crude oil imports plunging 57.3 per cent in volume to 4.73 million kilolitres as disruptions to shipping through the Strait of Hormuz affected energy flows.

In May, Japan recorded a trade deficit of around USD 2.34 billion, with exports rising 17.0 per cent year-on-year to 9.51 trillion yen, supported by strong demand for semiconductors, electronic components and motor vehicles. Imports increased 12.5 per cent to 9.89 trillion yen, driven by higher purchases of communication equipment.

Monetary Policy Outlook

Also, earlier in May, the Bank of Japan had raised its short-term policy rate to 1 per cent from 0.75 per cent. The apex bank marginally raised its GDP growth forecast for fiscal 2026, ending March 2027, to 0.6 per cent from 0.5 per cent in its economic activity outlook. (ANI)

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