Japan’s economy outpaces forecasts in Q2 despite US tariff headwinds

Japan’s economy grew faster than expected in the second quarter of 2025, with gross domestic product (GDP) expanding 1 per cent on an annualised basis, government data showed on August 15. The reading, well above the median market forecast of 0.4 per cent, marked the country’s fifth consecutive quarter of growth and came despite fresh US trade barriers. On a quarterly basis, GDP rose 0.3 per cent from the previous three months, exceeding expectations for a 0.1 per cent increase. The first quarter’s performance was also revised up, showing 0.6 per cent growth instead of a previously reported 0.2 per cent contraction.

The stronger-than-expected figures were driven by resilient exports and robust capital expenditure, which climbed 1.3 per cent in April-June versus a 0.5 per cent rise anticipated in a Reuters poll. Private consumption, which accounts for more than half of Japan’s economic output, rose 0.2 per cent, matching the previous quarter’s pace and beating forecasts for 0.1 per cent. Net exports contributed 0.3 percentage points to GDP, a sharp turnaround from a 0.8-point drag in the January-March period.

Tariff impact yet to be fully felt

Economists caution that the Q2 numbers may mask the longer-term impact of US tariffs. In April, Washington imposed 25 per cent duties on Japanese automobiles and auto parts, later lowering them to 15 per cent in July as part of a trade deal that also involved a $550 billion Japanese investment package in the US. Japanese automakers, who account for nearly 30 per cent of the country’s exports, have so far absorbed higher tariff costs by cutting prices for US customers, but analysts expect they will begin passing on costs in the months ahead, potentially dampening demand. The government recently cut its growth forecast for the current fiscal year to 0.7 per cent from 1.2 per cent, citing weaker capital spending and persistent inflation.

Bank of Japan rate hike expectations rise

The economic resilience could bolster the case for the Bank of Japan (BOJ) to resume interest rate hikes later this year, particularly as wage growth and consumption trends remain under close watch. The BOJ recently upgraded its fiscal 2025 growth forecast to 0.6 per cent, up from 0.5 per cent, but warned that slowing overseas economies and declining corporate profits could weigh on momentum.

Despite the caution, financial markets welcomed the data. The benchmark Nikkei 225 rose 0.59 per cent on August 15, while the yen edged 0.1 per cent higher to 147.6 per dollar.

(With inputs from agencies)