Context:

Japan posted 1.1% annualized GDP growth in the second quarter, underscoring a softer expansion than the 2% consensus as domestic demand cooled even as exports stayed firm. The quarterly rise was led by shipments abroad, aided in part by a weaker yen rather than a surge in volume. The quarter also marks the first full period affected by higher energy costs tied to the Iran conflict. The Bank of Japan nudged its 2026-27 growth outlook higher to 0.6%, while government steps to ease oil-price pressure and rising AI-related demand offer some offset to a decelerating path. Momentum is expected to stay moderate, with further headwinds and policy support shaping the outlook.

Dive Deeper:

• The economy grew 1.1% on an annualized basis in Q2, down from 2.1% in the previous quarter, indicating a slower pace of expansion.

• Exports were the main growth driver across all three months of the quarter, but the strength was aided by a weak yen rather than a pure increase in shipment volumes.

• This period is the first full quarter reflecting the impact of the Iran war, which has pushed energy prices higher for businesses and households.

• The Bank of Japan raised its GDP growth outlook marginally to 0.6% for the fiscal year ending March 2027, citing higher crude oil prices alongside tempered domestic demand.

• The central bank emphasized that growth will be moderated by energy costs but tempered by government measures to curb household oil expenses and by rising global AI-related demand.

• Many Japanese firms are involved in the semiconductor supply chain, suggesting sensitivity to global demand and technology cycles as a supporting factor.

• The outlook remains for moderate growth with policy support and external demand volatility likely to influence the trajectory for the rest of 2026 and into 2027.