Japan’s economy expanded more than expected in the second quarter of 2025, as export volumes remaind strong amid new U.S. tariffs, providing the central bank with favorable conditions to consider resuming interest rate hikes this year.
Government data released on Friday showed that Japan’s gross domestic product (GDP) grew 1 percent on an annualized basis, marking the fifth consecutive quarter of expansion following a revision of the previous quarter from contraction to growth.
However, analysts caution that global economic uncertainties, driven by U.S. tariffs, could pressure Japan’s GDP in the coming months, particularly as automakers face challenges in keeping prices competitive for American consumers.
Unexpectedly strong exports support growth
Japan’s GDP growth was supported by unexpectedly strong exports and capital spending, surpassing the median market forecast of a 0.4 percent increase. This followed a 0.6 percent rise in the prior quarter, which had been revised up from an initial 0.2 percent contraction.
This corresponds to a quarterly increase of 0.3 percent, exceeding the median forecast of a 0.1 percent gain.
Private consumption, representing over half of Japan’s economic output, increased 0.2 percent, above the market estimate of 0.1 percent groth, matching the growth rate of the previous quarter.
The Bank of Japan is monitoring consumption and wage trends to assess economic strength and decide when to adjust interest rates. Capital spending, an important driver of domestic demand, rose 1.3 percent in the second quarter, well above the 0.5 percent increase forecasted by economists.
Meanwhile, net external demand—exports minus imports—added 0.3 percentage points to Japan’s GDP growth, compared with a negative contribution of 0.8 points in Q1 2025.
In April, the United States imposed 25 percent tariffs on automobiles and auto parts and threatened similar levies on most other Japanese imports. A trade deal reached in July reduced those tariffs to 15 percent in exchange for a $550 billion Japanese investment package targeting the U.S. market.
Read: U.S. consumer prices rise 2.7 percent in July amid September rate cut betsÂ
U.S. tariffs to push Japan’s real GDP down by 0.3-0.4 percent
Japanese Economy Minister Ryosei Akazawa said at a press conference that the latest GDP figures confirm the country’s economy is recovering moderately. “Looking ahead, we expect better employment and income conditions and policy measures to support the modest recovery,” he said. “But we need to be mindful of downside risks from U.S. trade policies.”
Akazawa said the U.S. tariffs are likely to push down Japan’s real GDP by 0.3-0.4 percent.
Last week, the government lowered its inflation-adjusted growth forecast for the fiscal year to 0.7 percent from the previously projected 1.2 percent, citing the impact of U.S. tariffs on capital spending and ongoing inflation pressures weighing on consumer demand.
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