Japan's government recently announced that its Q2 gross domestic product (GDP) grew by 1,1% on an annualized basis. This figure is slower than the 1,9% growth recorded in Q1 and falls below Reuters' forecast of 2%.

"Growth remains positive, but the detailed figures are somewhat weaker than expected", said senior economist Kazutaka Maeda at Meiji Yasuda Research Institute.

Personal consumption was the biggest disappointment, declining by 0,02% for the first time in eight quarters, contrary to market expectations of a 0,5% increase. Meanwhile, private capital expenditure fell by 1,2%, against a market forecast of a 0,4% rise. Analysts attribute this weakness to uncertainties stemming from supply chain disruptions related to the conflict in the Middle East.

A bright spot was exports, which continued to rise, driven by strong demand in the US for hybrid vehicles and the global investment wave in artificial intelligence (AI), supporting the consumption of semiconductor-related equipment and components. Net exports contributed 0,5 percentage points to last quarter's GDP growth.

"The economy remains on a moderate recovery path, as export growth offsets weak domestic demand", stated Economy Minister Minoru Kiuchi.

Workers package strawberries in Oki, Fukuoka, Japan on 29/1/2025. Photo: AFP

Despite global uncertainties and a weak yen putting pressure on growth, analysts suggest that most headwinds are temporary factors. The overall economic momentum remains strong, providing a basis for the Bank of Japan (BOJ) to raise interest rates soon, with market expectations pointing to as early as September.

"I do not believe the latest data signals an economic slowdown in the near future or will affect the timing of the BOJ's interest rate hike", said Kazutaka Maeda.

Senior researcher Yoshiki Shinke of Dai-ichi Life Research Institute noted that factors dragging down capital investment, such as Middle East instability, are easing, while business investment plans remain robust. "The economy continues to show resilience, despite lower-than-expected growth", he stated.

Economy Minister Minoru Kiuchi stated that strong wage growth and policy support are likely to sustain the recovery momentum. However, the impact from the Middle East situation still requires careful monitoring.

The BOJ recently raised its economic growth forecast for the fiscal year ending in 3/2027 to 0,6% from the previous 0,5%.

By Phien An (according to Reuters, AP)