Japan Q2 growth misses forecasts on weaker spending, investment

Japan's economy expanded at a slower-than-expected rate of 1.1% in the second quarter, according to government figures released on Monday, falling short of forecasts that predicted 2.0% growth. The weaker performance was largely attributed to subdued household spending and reduced business investment, which partially countered the boost from robust exports.

Senior economist Kazutaka Maeda from Meiji Yasuda Research Institute noted that the growth was positive but weaker than anticipated, and he believed the data did not indicate a long-term weakness or impact the Bank of Japan's planned interest rate hike in September.

The quarterly GDP increase translated to a 0.3% rise, below the median estimate of a 0.5% increase. Private consumption, which constitutes over half of the economy, remained flat, failing to meet the market projection of a 0.5% growth. This stagnation was largely due to one-off factors such as free school lunches and higher tobacco prices. Capital spending, a crucial component of private demand, contracted by 1.2% in the quarter, compared to a forecast of a 0.4% increase.

Experts suggested that the decline in capital spending might have been influenced by geopolitical tensions in the Middle East, but these factors were expected to ease. Meanwhile, exports contributed positively to growth, buoyed by strong US demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence, particularly in semiconductor-related equipment and components.

Looking forward, analysts cautioned that rising import costs and price pressures could eventually affect consumer spending, potentially slowing growth in the July-September quarter. Private consumption might also face a slowdown after temporary policy and regulatory measures boosted demand for durable goods in the April-June period.

A recent survey indicated that 37 economists forecast a further slowdown in annualized GDP growth to an average of 0.05% in the next quarter.