Japan likely eked out growth last quarter even as tariffs hit
Net exports are estimated to have contributed to growth overall, a reversal from the previous quarter, helped by slower growth in imports
[TOKYO] Japan’s economy likely managed to avoid falling into a recession by posting modest growth in the second quarter, as domestic demand led by capital spending offset the drag from US tariffs, according to economists surveyed by Bloomberg.
Gross domestic product likely expanded at an annualised pace of 0.4 per cent in the three months to June compared with the prior period, when GDP contracted, according to the median estimate of economists.
Economists’ views varied widely ahead of the release, with four of 32 analysts surveyed having projected a contraction, as five predicted growth of 1 per cent or more. The Cabinet Office is set to release the preliminary data on Friday (Aug 15).
A modest expansion to avoid a technical recession would offer some reassurance to policymakers at a time when the economic outlook has dimmed. Earlier this month, the government slashed its growth projection for the current fiscal year to 0.7 per cent from 1.2 per cent, partly to account for the expected impact from US tariffs on exports.
The data may keep the Bank of Japan (BOJ) on the path towards another rate hike this year if authorities are confident that domestic demand can stay resilient even as US trade policies continue to cause stress for global commerce.
Friday’s GDP data will be the first to reflect the impact of US President Donald Trump’s across-the-board tariffs and auto levies, which took effect in April. The initial 10 per cent baseline tariff rate was raised to 15 per cent from this month, while 25 per cent levies on cars are set to fall to the same level.
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Japan’s exports fell in value in both May and June, but not significantly in volume, as companies lowered selling prices. Net exports are estimated to have contributed to growth overall, a reversal from the previous quarter, helped by slower growth in imports. Also, spending by inbound tourists, a component of net exports, increased by 18 per cent in the period, as the number of tourists arriving in the first half of 2025 reached a record high.
“It’s easy to think that the negative effects of Trump’s tariffs would have started showing up in exports between April and June, but that wasn’t really the case,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting. “Exporters rushed to ship goods even with the 10 per cent tariff in place, fearing it could soon climb to 25 per cent,” he said.
Kobayashi, who forecasts 0.2 per cent overall growth, said that service exports fuelled by inbound tourism, along with steady business investment, helped drive the modest expansion.
Capital spending is forecast to show a rise of 0.7 per cent in the period. In the BOJ’s latest Tankan survey, large firms across various sectors said that they intend to increase investment by 11.5 per cent in the current fiscal year, an upward revision from a 3.1 per cent forecast in the previous survey. Businesses investing in software and urban redevelopment projects may have buoyed capital investment, according to Taro Kimura, economist at Bloomberg Economics.
Forecasts for private consumption range between -0.1 per cent and 0.3 per cent, with the consensus estimate showing a 0.1 per cent advance. Household spending rose in both May and June, in a sign of resilience, though persistent inflation continues to weigh on consumer sentiment.
Voter frustration over soaring costs of living was a key factor setting the stage for Prime Minister Shigeru Ishiba’s ruling coalition to suffer a historic setback in an upper election last month. Ishiba’s coalition lost its majority in the upper house, forcing the premier to govern without a majority in either house of parliament.
Calls for Ishiba to step down have intensified, throwing into question his ability to govern as he seeks cooperation from the opposition. So far, Ishiba has vowed to carry on as he oversees the implementation of the trade deal with the US.
As for the outlook, it remains to be seen how hard tariffs will hit exports. Japan avoided the worst-case scenario in tariff negotiations, and there’s evidence that some companies have largely managed to navigate trade uncertainty so far. Early monthly trade data suggested that auto exports to the US held up in value terms, as manufacturers adjusted pricing to sustain shipment volume.
Still, if companies are slashing prices to preserve market share, their margins will shrink, casting doubts over the extent to which they can continue to lift wages. That would spell trouble for Ishiba and his Liberal Democratic Party, while also raising questions as to whether the economy can sustain another BOJ rate hike.
“Markets may see the April to June GDP as a sign that the worst is over and the economy is on the mend, but it’s important to stay level-headed,” Kobayashi said, warning against overconfidence amid strong stock market trends. “The economy will likely shrink over the summer as the lift from front-loaded exports disappears.” BLOOMBERG
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