Japan's GDP grows 1.1% in the second quarter, below expectations

Japan's economy expanded by 1.1% annualized in the second quarter, slightly below market expectations of 2%, according to official data released on August 17, 2026. The growth rate marked a slowdown from the previous quarter’s 2.1% expansion. This was the first full quarter incorporating the effects of the Iran conflict, which has driven up energy prices for businesses and households. The main driver of economic growth came from exports, which exceeded expectations during the three-month period. However, analysts noted that this performance was largely attributed to the weakening yen rather than an increase in the volume of shipments. In comparison with the first quarter of 2026, GDP rose by 0.3%, lower than the anticipated 0.5%. Exports contributed 0.5 percentage points to the result, while domestic demand subtracted 0.2 percentage points due to weaker internal consumption. Domestic demand declined primarily because of a reduction in public inventory levels. This was linked to the government releasing national oil reserves to address the Middle East conflict, as reported by CNBC. Consumer spending also disappointed, with purchases of non-durable goods and service consumption falling amid a deteriorating consumer sentiment. Business investment similarly contracted compared to the prior quarter. On an annual basis, Japan’s economy grew by 0.7%, surpassing the 0.5% recorded in the first quarter. At the start of this month, the Bank of Japan published its economic outlook report and modestly raised its projection for GDP growth in the fiscal year 2026, ending in March 2027, from 0.5% to 0.6%. The slower-than-expected growth highlights ongoing challenges facing Japan’s economy despite the country’s traditional strength in exports. While the weak yen has provided some support, it has not been enough to offset declining domestic demand and subdued business investment. Analysts suggest that the continued uncertainty surrounding global markets, particularly in light of regional conflicts, will likely influence future economic performance. The government’s release of oil reserves to stabilize energy costs reflects broader efforts to manage inflation pressures and maintain economic stability. However, these measures have had unintended consequences, including reduced public inventory levels and a dampening effect on domestic consumption. The central bank’s revised growth forecast indicates a cautious approach to economic conditions, suggesting policymakers remain wary of potential headwinds ahead. Looking forward, the Japanese economy faces a delicate balance between maintaining export-driven growth and stimulating domestic demand. With global trade tensions and geopolitical uncertainties persisting, the path to sustained recovery remains uncertain. The coming months will be critical in determining whether Japan can achieve its projected growth targets and restore confidence among consumers and investors.