GDP Growth with Concern

The Cabinet Office released Japan’s GDP in the second quarter of 2026, which showed 0.3 percent of growth from the previous quarter and 1.1 percent of annual growth. Although it marked consecutive growth for three quarters, domestic demand slowed down with decline of individual consumption. It is uncertain whether Japan can maintain the growth in the next quarter. 

Individual consumption, which occupies about a half of GDP, marked minus 0.02 percent, the first decline in these eight quarters. Consumption of tobacco declined with price increase in April. Payment of high school tuition dropped with promotion of subsidy. Lodging and dining also declined. It is possible that the war in Iran gave negative psychological impact on consumers.

 

On the other hand, cars and air conditioners contributed to the growth. Abolition of car tax dependent on its environmental capability dropped car price, encouraging purchases. Regulation on energy saving for air conditioners, which is scheduled to be introduced in April 2027, urged consumers early purchase before the price would rise.

 

Capital investment dropped by 1.2 percent, the negatives for two consecutive quarters. Major element was decline of research and development services. Investment on housing marked 0.5 percent of decline. Small and mid-size enterprises, which occupy 99 percent of companies in Japan, have been suffering from steep price hike of imported raw materials, mainly caused by oil price hike with volatile situation in the Middle East.

 

Increase of foreign demand supported growth of the GDP. The margin between export and import marked 0.5 point of plus. Export, which has positive impact on GDP, grew by 0.5 percent with increase of research and development services including transfer of patent rights. But consumption of the inbound declined by 9.7 percent. It is possible that China’s regulative policy against visiting Japan after Japanese Prime Minister Sanae Takaichi’s comment on Taiwan contingency in November 2025 might have affected.

 

1.2 percent of decline in import contributed to keep GDP growth. Effective blockade of the Strait of Hormuz caused steep decline of oil import. It was the first decline in these two quarters. Depreciation of Japanese yen in foreign exchange may work against growth of import. Increase in foreign demand helped the balance manage to keep growth of the GDP.

 

As Takaichi insists on her policy to reduce consumption tax rate for foods from 8 percent to 1 percent without viable fiscal resource, credibility on her financial policy has been exacerbated with concern on expansion of governmental debt. After the coordinated intervention by financial sector of both governments of Japan and the United States, Japanese yen is gradually depreciating.

Depreciation of yen causes interest hike of long-term bonds. Japanese 10 year government bond yield temporarily rose up to 2.945 percent in August 18th. A speculation that the Bank of Japan will raise its policy rate in next monetary meeting also encourages the rise of interest. There is a prediction that consecutive growth from 2020 may mark a period in next quarter.

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