Japan's Q2 GDP growth slows to 1.1%, energy costs weigh on demand

Japan's economy expanded at an annualised rate of 1.1 per cent in the April-June quarter, marking a second consecutive quarter of growth but falling well short of the 2.0 per cent that markets had anticipated. The latest government data, released on Monday, showed the world's fourth-largest economy is still feeling the effects of the ongoing Middle East conflict, which has disrupted energy supplies and clouded the outlook for businesses and consumers alike.

On a quarter-on-quarter basis, gross domestic product rose 0.3 per cent, below the 0.5 per cent forecast. While exports contributed a positive 0.5 percentage points to growth, this was largely offset by a 0.2 percentage-point drag from weaker domestic demand. Year-on-year, the economy expanded 0.7 per cent, a slight improvement from the 0.5 per cent recorded in the first quarter.

Capital spending was the biggest drag on growth, contracting 1.2 per cent during the quarter against expectations of a 0.4 per cent increase. This followed a 1 per cent decline in the previous quarter. Private consumption, which accounts for more than half of Japan's economic output, also remained subdued as households continued to grapple with a rising cost of living and chose to keep spending in check.

The weakness in domestic demand comes as the conflict in the Middle East pushed up energy prices, creating fresh uncertainty for both businesses and consumers. The April-June period was the first full quarter to capture the economic fallout from the Iran conflict. Trade data had already flagged the impact, with crude oil imports plunging 57.3 per cent in volume to 4.73 million kilolitres as shipping disruptions through the Strait of Hormuz affected energy flows.

In May, Japan recorded a trade deficit of around USD 2.34 billion. Exports rose 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.

Earlier in May, the Bank of Japan raised its short-term policy rate to 1 per cent from 0.75 per cent. In its latest economic outlook, the central bank marginally revised its GDP growth forecast for fiscal 2026, which ends in March 2027, to 0.6 per cent from 0.5 per cent.