Japan’s economy expanded at an annualized real rate of 1.1 percent in the April-June quarter, falling well short of the 1.67 percent consensus forecast, as private consumption slipped for the first time in eight quarters and the Iran war’s impact on energy costs began to bite.
The Cabinet Office released the first preliminary GDP estimate on Monday, showing quarter-on-quarter growth of 0.3 percent. The figure marks Japan’s third consecutive quarterly expansion, but the pace slowed sharply from the 0.5 percent quarter-on-quarter growth posted in the January-March period.
Oil Shock Meets Fragile Demand
The April-June period was the first full quarter in which the economy absorbed the full effects of the U.S.-Israeli war with Iran, which has effectively closed the Strait of Hormuz to most tanker traffic. Crude oil prices surged, pushing up import costs for resource-poor Japan and weighing on business and consumer confidence.
Private consumption, which accounts for more than half of Japan’s GDP, edged down 0.02 percent from the previous quarter. A Cabinet Office official attributed the decline partly to expanded government subsidies for high school tuition and school meal fees that began in April, which reduced out-of-pocket spending on those items. A tax hike on heated tobacco products from April also dampened demand.
“While wage increases seem to have taken hold, consumption sentiment appears cautious due to concerns about future price hikes,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. Real wages logged their sixth straight monthly rise in June, yet households have not translated higher earnings into spending.
Government Spending and Trade Mixed
The GDP figure was partly rescued by a 1.6 percent gain in government consumption, driven by the expanded subsidy program. Government spending provided the main upward impetus to overall growth during the quarter.
Business investment declined 1.2 percent quarter-on-quarter, partly due to reduced orders for software. Exports rose modestly by 0.5 percent, while imports fell 1.5 percent as the Hormuz closure disrupted crude oil shipments. The drop in imports technically boosted the GDP calculation, masking underlying demand weakness.
Nominal GDP increased at an annualized rate of 4.8 percent, reflecting the pass-through of higher energy prices into the price level.
Outlook and Bank of Japan Implications
The subdued data complicates the Bank of Japan’s rate-setting calculus. Markets had been pricing in a possible September rate hike, but economists suggest the government may resist such a move given the downside risks. Higher borrowing costs would also increase the servicing burden on Japan’s massive government debt.
Looking ahead, analysts warn that elevated crude oil prices and a weaker yen are set to push companies toward further price increases from the autumn, potentially suppressing consumption further. The government has already cut its full-year FY 2026 GDP growth forecast to 0.9 percent, reflecting the darker outlook from prolonged energy disruption.
Sources: Kyodo News; Japan Cabinet Office; Reuters; Norinchukin Research Institute
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