Unexpected growth in Q2
Japan’s economy expanded by 0.3% in the second quarter of 2025, outpacing expectations of 0.1%. The result compares with revised 0.1% growth in the first quarter. Annualized growth came in at 1%, more than double the 0.4% forecast. On a yearly basis, GDP grew 1.2%, slower than the 1.8% recorded in the first quarter.
Exports drive the rebound
Exports contributed 0.3 percentage points to growth, reversing a sharp 0.8% contraction earlier in the year. The trade deficit also narrowed between April and June, according to the trade ministry. Markets reacted modestly, with the Nikkei 225 rising 0.59% and the yen firming to 147.6 per dollar.
Tariff headwinds intensify
Despite the stronger-than-expected results, Japan faces steep U.S. trade barriers. A new 15% blanket tariff on exports was agreed in July, alongside existing 25% duties on autos, which represent more than a quarter of Japan’s shipments abroad. Economists warn that investment and exports could weaken in the months ahead, raising the risk of stagnation.
Outlook remains uncertain
The Bank of Japan recently upgraded its growth forecast for the 2025 fiscal year to 0.6%. Still, officials highlighted global risks and weaker corporate profits. Analysts such as Masato Koike expect wage gains to support consumer spending in the short term but caution that tariffs may weigh on bonuses, investment, and overall growth into 2026. Some warn that Japan could slip into recession if external shocks persist.
