Japan's Q2 Growth Misses Forecasts as Consumption Stalls

Japan's economy grew at an annualised rate of 1.1% in the April-June quarter, government data showed on Monday, falling well short of the 2.0% median forecast in a market poll. The reading marks a slowdown from the previous quarter's upwardly revised 1.9% expansion, though it still extends the growth streak to three consecutive quarters.

On a quarterly basis, gross domestic product rose 0.3%, against an expected 0.5% increase. The softness was driven largely by private consumption, which accounts for more than half of economic output and was flat during the period, missing the 0.5% growth anticipated by analysts.

Capital spending, another key pillar of private demand, declined 1.2% in the second quarter, versus a forecast for a 0.4% rise. The weakness in domestic demand was partly offset by net external demand, which contributed 0.5 percentage point to overall growth. Exports remained resilient, supported by strong US demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence, which boosted shipments of semiconductor-related equipment.

The data comes as the Bank of Japan weighs whether to raise interest rates further. Consumption and wage trends are central to that decision, and the latest figures suggest headwinds from higher raw material costs and supply disruptions linked to the Middle East conflict are weighing on household spending.

Analysts caution that rising import costs and upstream price pressures could eventually pass through to consumers, posing a risk to spending later this year. A pullback in the July-September quarter is also possible, after policy and regulatory changes temporarily lifted demand for durable goods such as automobiles and air conditioners in the April-June period.

A survey this month by the Japan Center for Economic Research found that 37 economists expect annualised GDP growth to slow to an average of just 0.05% in the current quarter.