Japan Economy Grows 1.1% in Q2 as Consumer Spending Stalls

Japan’s economy expanded for a third consecutive quarter in April-June, but growth came in weaker than expected as sluggish consumer spending and declining business investment weighed on domestic demand.

Gross domestic product (GDP) grew at an annualized rate of 1.1% in the second quarter, below the 2.0% growth forecast by economists. The result also marked a slowdown from the upwardly revised 1.9% expansion recorded in the previous quarter.

On a quarter-on-quarter basis, Japan’s GDP increased 0.3%, missing market expectations for 0.5% growth.

Private consumption, which represents more than half of Japan’s economic output, was unchanged during the quarter. Economists had expected a 0.5% increase. Household spending faced pressure from higher raw material costs and supply disruptions associated with the Middle East conflict.

Weak consumption could be significant for the Bank of Japan (BOJ), which is closely monitoring wages, household demand and broader economic conditions as it considers the timing of additional interest rate hikes.

Business investment also disappointed. Capital spending declined 1.2% during the second quarter, compared with forecasts for a 0.4% increase.

External demand provided a stronger contribution, with net exports adding 0.5 percentage point to economic growth. Japanese exports remained resilient, supported by robust U.S. demand for hybrid vehicles and continued global investment in artificial intelligence. AI-related spending helped sustain shipments of semiconductor equipment and electronic components.

However, Japan’s economic outlook remains uncertain. Rising import prices and increasing costs for businesses could eventually be passed on to households, potentially weakening consumer spending later in 2026.

Consumption may also lose momentum in the July-September quarter after regulatory and policy changes temporarily lifted demand for durable goods, including automobiles and air conditioners, during April-June.

Economists are forecasting little growth in the current quarter. A Japan Center for Economic Research survey of 37 economists projected average annualized GDP growth of just 0.05% for July-September, highlighting concerns that Japan’s economic recovery could lose momentum.