Japan’s Q2 GDP Doubles Expectations on Strong Domestic Demand and Net Exports Rebound

TradingKey - According to data released by Japan’s Cabinet Office on August 15, Japan’s real GDP in Q2 2025 grew 0.3% quarter-on-quarter, marking the fifth consecutive quarter of expansion. Year-on-year growth reached 1.0%, far exceeding the expected 0.4%, signaling that the Japanese economy is firmly on a recovery path.

Japan Q2 2025 GDP Growth YOY, Source: TradingKey

The Japanese government also revised Q1 GDP growth from -0.2% to +0.6%, reversing the previously recorded first economic contraction in a year.

Looking at the components of Q2 GDP, growth was broad-based. Private consumption, which accounts for more than half of Japan’s economic output, rose 0.2%, matching Q1’s pace and exceeding the 0.1% forecast. Capital spending, a key driver of domestic demand, surged 1.3%, well above the 0.5% consensus and previous quarter’s 1.0%.

Surprisingly, net exports turned positive, rising to +0.3% from -0.8% in Q1, and above the expected +0.1%, despite ongoing U.S. tariff threats.

The U.S. imposed a 25% tariff on automobiles and auto parts in April 2025, but following the U.S.-Japan trade agreement in July, the rate was reduced to 15%.

However, some analysts suggest the strong net export performance may have benefited from pre-loading by exporters ahead of tariff changes, and the full impact could become more evident in Q3.

Japan’s Economic and Fiscal Policy Minister Ryosei Akazawa said the Q2 GDP data shows the economy is experiencing a moderate recovery, with expectations for continued improvement in employment and income. 

However, he cautioned about downside risks from U.S. trade policy, which could reduce Japan’s GDP growth by 0.3–0.4 percentage points.

The unexpectedly strong growth strengthens the case for the Bank of Japan (BOJ) to resume rate hikes. While the BOJ is expected to hold rates steady in September, the likelihood of a rate increase in October has risen, though still below 50%.

Following the data release, USD/JPY declined, down 0.43% on the day to 147.20. Since August, the yen has strengthened from around 150, supported by rising expectations of Fed rate cuts and a more hawkish BOJ.