Government data released on Monday showed that Japan's economy grew by an annualised 1.1% in the April-June period. This figure was lower than the 2.0% expansion projected by a Reuters poll of economists and follows a revised 1.9% growth rate recorded in the previous quarter.
The report identified a 1.2% decline in capital spending and flat household consumption as primary factors for the slower-than-expected growth. Analysts cited by Reuters attributed these results to temporary issues, including supply chain disruptions and shifts in government spending, even as the ongoing war in Iran impacted overall confidence.
Domestic demand remained weak, with private consumption falling 0.02% despite recent regulatory changes that had briefly increased sales of durable goods like air conditioners and automobiles. Economy Minister Minoru Kiuchi stated that while the economy is on a moderate recovery path, the impact of Middle East instability requires caution.
Additional data showed that net external demand, representing the difference between exports and imports, contributed 0.5 percentage points to the growth rate. This was largely due to a sharp drop in imports following temporary disruptions to crude oil shipments through the Strait of Hormuz, while demand for Japanese hybrid vehicles and semiconductor equipment remained steady.
The scale of the slowdown is significant for the world's fourth-largest economy. The 1.1% annualised growth represents a deceleration from the 1.9% seen in the first quarter of the year. Furthermore, business investment—a key metric for future economic health—dropped by 1.2% during the three-month period, contrary to expectations of a 0.4% increase. This decline was partially driven by the overseas sale of a large pharmaceutical patent, which is calculated as a drop in domestic capital spending but an increase in service exports.
Looking ahead, Japanese consumers may face higher costs for imported goods starting in the autumn due to a weak yen and rising crude oil import prices. While government subsidies have limited inflation so far, economists from the Norinchukin Research Institute suggest that these price pressures will eventually be passed on to the public. The Japan Center for Economic Research currently forecasts that growth will slow further to just 0.05% in the July-September quarter. The next major milestone for policy will be the Bank of Japan's upcoming meetings, where officials will decide if the current "moderate recovery" justifies a more gradual or immediate tightening of monetary policy.