Japan’s Second-Quarter Growth Falters Amid Weak Consumption and Capital Spending

Japan’s economy experienced a slowdown in the second quarter of the year, driven by sluggish consumption and declining capital spending, official data revealed. Gross domestic product (GDP) expanded by 0.3 percent in the April-June period compared to the first quarter, according to figures published by Japan’s Cabinet Office on Monday.

While marking the third consecutive quarter of expansion, the growth rate slowed from 0.5 percent in the previous period and fell short of the 0.5 percent quarterly growth predicted by analysts. On an annualised basis, the world’s fourth-largest economy grew by 1.1 percent, significantly missing the 1.67 percent annualised expansion forecast by a survey of 37 economists conducted by the Japan Center for Economic Research.

Data showed that private consumption remained flat in real terms, while capital expenditures dropped by 1.2 percent—translating to a 4.6 percent decline on an annualised basis—which offset strong performance in exports. Net exports contributed 0.5 percentage points to GDP growth, whereas domestic demand had a negative impact of 0.2 percentage points.

Norihiro Yamaguchi, lead economist for Japan at Oxford Economics, noted that growth is likely to remain sluggish through the second half of 2026 as businesses pass rising energy costs onto consumers. Yamaguchi stated that while AI-related goods exports will remain strong in the near term, weaker non-AI global economic activities will restrict overall export gains. Japan remains heavily vulnerable to elevated energy costs due to importing nearly all of its crude oil, exacerbated by fallout from the United States-Israel war on Iran.

Cost pressures on Japanese consumers have also been intensified by the depreciation of the Japanese yen, which reached a 40-year low against the US dollar last month. These weaker-than-anticipated figures could complicate upcoming decisions by the Bank of Japan (BOJ) regarding interest rates in September, as the central bank continues efforts to normalise monetary policy following decades of ultra-low and negative borrowing costs. In June, the BOJ raised its benchmark interest rate to 1 percent, its highest level in over thirty years, continuing a policy shift that began in 2024 with its first rate hike since the 2008 global financial crisis.

Meanwhile, Japan’s stock market advanced on Monday, with the benchmark Nikkei 225 rising 0.3 percent by 05:15 GMT. Neighboring markets also saw gains, with South Korea’s KOSPI up 2.4 percent and Hong Kong’s Hang Seng Index climbing 1.6 percent.