Japan's economy expands below forecast

Japan's economy expanded at an annualized rate of 1.1 percent in the second quarter of 2026, below expectations. Government data revealed a significant slowdown from the first quarter's revised 1.9 percent growth. On a quarter-on-quarter basis, gross domestic product increased by 0.3 percent, also below the anticipated 0.5 percent. This marks a notable deceleration compared to the previous three months. The primary factor behind this slower expansion was a weakening of domestic demand. Private consumption, which constitutes over half of Japan's economic activity, remained flat during the April-June period, missing estimates for a 0.5 percent increase, largely due to persistent cost pressures affecting household finances. Capital expenditure also fell by 1.2 percent in the second quarter, following a 1.0 percent decrease in the first quarter. This reflects weaker business sentiment and heightened uncertainty regarding the economic outlook, defying forecasts for a gain. However, external demand provided some cushioning to the slowdown, contributing 0.5 percentage points to overall growth. Exports rose by 0.5 percent, while imports fell by 1.5 percent, reversing a previous increase. This offset domestic weaknesses. Economists caution growth could soften further in the third quarter. Ongoing price pressures, partly influenced by the Middle East situation, are expected to squeeze household finances and corporate budgets. These inflationary trends, coupled with a weaker yen, are fueling expectations the Bank of Japan might consider raising interest rates soon. The government is reportedly considering measures to limit high input cost pass-through.