Japan's Q2 Growth Slows as Spending, Investment Falter

Japan's economy expanded at a slower-than-expected pace in the April-June quarter, fresh government data showed on Monday, as weak household spending and a drop in business investment tempered the boost from robust exports.

Gross domestic product rose at an annualised rate of 1.1%, falling short of the median market forecast of 2.0% and below the previous quarter's upwardly revised 1.9% expansion. On a quarterly basis, the economy grew 0.3%, against an expected 0.5%.

Private consumption, which accounts for over half of economic output, was flat in the quarter, missing the 0.5% rise analysts had predicted. The softness was partly attributed to one-off factors, including the impact of tuition-free education policies and higher tobacco prices, which shifted some spending patterns.

Capital spending, a key driver of private demand, declined 1.2% in the second quarter, versus a forecast for a 0.4% increase. Analysts suggested the fall may reflect disruptions linked to Middle East tensions, though those pressures are easing and corporate investment plans remain intact.

Net external demand — exports minus imports — contributed 0.5 percentage point to growth. Exports stayed resilient, supported by solid US demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence, which boosted shipments of semiconductor-related equipment.

Economists noted that while the headline figure was disappointing, the underlying details suggest temporary drags rather than a fundamental loss of momentum. Consumption and wage trends remain key indicators the Bank of Japan is monitoring as it weighs further interest rate hikes, with a move as soon as September still widely expected.

Looking ahead, analysts cautioned 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 private consumption is also possible in the July-September quarter, following policy-driven boosts to demand for durable goods like cars and air conditioners in the previous period.

A recent survey by the Japan Center for Economic Research showed economists expect annualised growth to slow to an average of just 0.05% in the current quarter.