1.2%! Japan's GDP in the second quarter exceeded expectations for growth

Japan's economy demonstrated unexpected resilience in the second quarter, with growth rates far exceeding economists' predictions. This not only provides strong support for the Bank of Japan to raise interest rates again within the year but also brings rare positive news to Prime Minister Shigeru Ishiba, who is facing political pressure.

According to a report released by the Cabinet Office of Japan on Friday, the country's Gross Domestic Product (GDP) grew at an annualized rate of 1.0% from April to June this year, significantly higher than the 0.4% predicted by economists. Meanwhile, the official data for the first quarter was revised from an initial report of contraction to a growth of 0.6%.

Compared to the same period last year, Japan's GDP grew by 1.2% in the second quarter, down from a 1.8% increase in the first quarter.

Following the data release, the yen rose against the dollar, and Japanese stocks saw a slight increase.

The strong performance in Japan's second quarter was mainly supported by domestic demand. Data showed that corporate investment increased by 1.3% quarter-on-quarter, exceeding the general expectation of 0.7%. Hiromu Komiya, an economist at the Japan Research Institute, pointed out, "Even amid the uncertainties brought by U.S. tariffs, corporate investment has been steadily growing."

Private consumption, which accounts for nearly 60% of the economy, also saw a slight increase of 0.2%. This was partly due to robust wage growth resulting from this year's wage negotiations, with Japan's major companies committing to wage increases exceeding 5%, outpacing inflation. Economist Komiya predicts, "We expect real wages to start rising in the fall, which will provide more momentum for household consumption."

Unexpectedly Strong Exports Offset Tariff Impact

In terms of external factors, net exports contributed 0.3 percentage points to economic growth in the second quarter, performing better than expected.

Despite facing heavier tariff barriers, Japan's actual export value still grew by 2%. Reports indicate that some companies maintained market share by lowering sales prices, while some exporters shipped goods in advance before Trump threatened to raise tariffs to 25%.

Additionally, a strong inbound tourism sector also supported net exports. Data showed that foreign tourists' spending in Japan grew by 18% in the second quarter, with the total number of tourists in the first half of 2025 reaching a record high.

Paving the Way for Interest Rate Hikes?

This strong GDP data undoubtedly adds weight to the Bank of Japan's path toward policy normalization. Taro Kimura, an economist at Bloomberg Economics, stated in a report: "Japan's unexpectedly strong GDP in the second quarter supports the Bank of Japan's recent interest rate hike, proving that domestic demand remains robust despite facing higher tariffs from the U.S."

Although the market generally expects the Bank of Japan to maintain interest rates at its next policy meeting on September 19, a survey indicated that about 42% of economists expect action in October. Bank of Japan Governor Kazuo Ueda stated last month that if there is confidence in the stability of domestic demand, authorities will continue to raise borrowing costs

In addition, after the ruling coalition lost its majority in the Senate elections last month, CCTV News reported that Shigeru Ishiba plans to announce his resignation by the end of August. However, Ishiba later came forward to deny the rumors and reiterated his intention to remain in office