Japan’s Economy Expands Faster Than Expected Even as Tariffs Hit
Japan’s economy expanded faster than expected last quarter led by solid domestic demand, giving embattled Prime Minister Shigeru Ishiba some rare good news as he fends off calls to resign following last month’s historic election setback.
Gross domestic product grew at an annualized pace of 1% in the three months through June from the prior period, surpassing economists’ forecast of a 0.4% gain, the Cabinet Office reported Friday. Authorities revised the previous quarter’s results to 0.6% growth, reversing from a preliminary contraction.
Gains were led by business investment, which rose 1.3% from the previous quarter, surpassing the consensus estimate of 0.7% growth. Private consumption nudged 0.2% higher.
Friday’s GDP figures are the first to reflect the impact of President Donald Trump’s so-called reciprocal tariffs and auto levies, which took effect in April. During the period, Japan faced a 10% baseline tariff along with 25% levies on cars. A 25% tax on US steel imports introduced in March was doubled in early June.
Ishiba’s administration has said the car levies will be set at 15%, the same as the current baseline rate, once Washington adjusts executive orders in line with an agreement reached in late July. Earlier this month the government cut its real growth projection for this fiscal year to 0.7% from a previous forecast of 1.2%. The downgrade partly reflected a darkening global economic outlook resulting from Trump’s trade policies.
Against that backdrop, the economy’s show of resilience in the April-June period will provide some political relief for Ishiba, whose ruling coalition lost its majority in the upper house in last month’s election partly due to widespread frustration over the persistent rise in cost of living. Ishiba has so far rejected calls from within his party to resign.
Signs of economic resilience will allow the Bank of Japan to stay on a gradual path toward rate hikes. While the BOJ is expected to hold steady when it next sets policy on Sept. 19, some 42% of economists surveyed by Bloomberg anticipate a move in October. Governor Kazuo Ueda said last month that authorities will keep raising borrowing costs if they’re confident domestic demand can stay steady.
Net exports contributed 0.3 percentage point to growth. Despite heavier US tariffs, exports mostly held up in real terms, as companies cut selling prices to preserve market share. Some exporters also front-loaded shipments under the 10% levies as Trump threatened to raise the levies to 25%. Monthly trade data showed that exports fell in value in both May and June, but not significantly in terms of volume.
Resilient inbound tourism also propped up net exports. Spending by foreign visitors increased by 18% in the quarter, with tourist arrivals in the first half of 2025 hitting a record high.
The third quarter may reflect a bigger impact from tariffs now that front-loading has stopped. Other risks to growth include persistent inflation, with data due next week expected to show consumer price growth remained well above the BOJ’s target in July. That could weigh on consumer spending as households cut back on discretionary outlays.
Source : Bloomberg
