Economy beats expectations in the second quarter

GDP reading tops expectations: GDP growth accelerated to 1.0% in seasonally adjusted annualized rate terms (SAAR) in the second quarter, up from 0.6% in the first quarter and exceeding market expectations—strengthening the case for the BOJ to hike rates in Q4. On a yearly basis, economic growth lost steam, cooling to 1.2% in Q2, compared to the previous quarter's 1.8% growth.

Fixed investment and net trade drive GDP growth: Domestically, the expansion was driven by fixed investment growth, which picked up to 3.7% in Q2, following the 3.5% increase in the previous quarter. The uptrend in capital outlays remained driven by digitalization and growing investor interest in relatively cheap Japanese equities. Moreover, public spending was stable in the second quarter (Q1: -2.1% SAAR). Externally, net trade made a positive contribution to GDP growth, likely reflecting continued frontloading of exports ahead of U.S. tariffs. Exports of goods and services rebounded 8.4% in Q2 (Q1: -1.2% SAAR), while imports of goods and services growth waned to 2.6% in Q2 (Q1: +12.0% SAAR). Less positively, private consumption increased 0.6% in the second quarter, which was below the first quarter's 0.9% expansion, likely weighed on by higher inflation and worries about the impact of U.S. tariffs on jobs.

Panelist insight: EIU analysts said: “EIU will revise its real GDP forecast for 2025 from 0.6% to 1%, given resilient domestic demand and the stronger-than-expected lift from front-loaded trade. We still expect slower economic growth in the second half of the year, including moderate contraction in the July-September quarter. However, growth will resume in the last quarter of 2025 and will pick up by mid-2026.” Goldman Sachs economists commented: “We expect exports to turn slightly negative from Q3 through early 2026, as tariff increases take hold and US domestic demand slows. We also expect private consumption growth to remain moderate as a trend, as still high inflation and weaker corporate earnings could weigh on year-end bonuses. In addition, we are concerned about the negative impact of lower exports on capex. We forecast real GDP growth to slow to +0.4% qoq annualized in Q3.”

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