Japan’s economy grew at an annualized rate of 1.1% in the second quarter of 2026, falling well short of the 2% growth anticipated by markets and slowing from 2.1% in the previous quarter. The lower-than-expected expansion highlights how weakening domestic demand offset strong export performance.

On a quarter-on-quarter basis, GDP rose 0.3%, below the forecast 0.5%, though year-on-year growth edged up to 0.7%. Following the data release, the Nikkei 225 gained 0.43%, while the Japanese yen strengthened slightly to 159.1 against the U.S. dollar.

Exports served as the main engine of growth, contributing 0.5 percentage points to total GDP, buoyed by a weak currency that boosted shipment values. However, domestic demand dragged the total figure down by 0.2 percentage points. A major contributor to this decline was a drawdown in public inventories, largely stemming from the release of national oil reserves to cushion the fallout from the Middle East conflict.

This quarter marks the first full period capturing the impact of the Iran war, which pushed energy costs higher for businesses and consumers. Household sentiment weakened, leading to dips in service consumption and non-durable goods purchases, alongside a quarterly contraction in business investment.

Looking ahead, the Bank of Japan recently nudged its fiscal 2026 GDP growth forecast up to 0.6%, anticipating moderate growth supported by global AI demand and semiconductor supply chain strength. However, the central bank warned that elevated crude oil prices remain a key headwind. Analysts also caution that government measures to curb domestic energy costs are fading, leaving consumer purchasing power vulnerable to rising inflation in the second half of the year.

End Notes

Source: https://www.cnbc.com/2026/08/17/japan-gdp-misses-estimates-trade-exports-yen-nikkei.html