Japan’s Q2 2025 GDP Growth Accelerates to 0.6% Quarter-over-Quarter

Japan’s economy expanded at a faster-than-expected pace in the second quarter of 2025, posting a 0.6% quarter-over-quarter (QoQ) growth rate, according to official data. The improvement marked a rebound from the 0.2% contraction recorded in the previous quarter and outperformed market forecasts of a 0.4% increase. The report underscores resilience in domestic demand amid global economic uncertainties.

Key Drivers of Growth
Private consumption, a primary growth pillar, rose by 0.5% QoQ, supported by steady employment and wage growth. The expansion in household spending offset earlier concerns over inflationary pressures. Meanwhile, capital expenditure by businesses increased by 0.7%, reflecting cautious optimism about long-term investment opportunities. The nonmanufacturing sector, including services and retail, contributed significantly to the uptick, growing by 0.8% QoQ.

Net exports, however, remained a drag on growth, contracting by 0.3% QoQ due to weaker global demand for Japanese goods. Exports of machinery and automotive parts declined, while imports rose modestly, narrowing the trade surplus. Analysts noted that the yen’s recent appreciation against major currencies further challenged export competitiveness.

Government Spending and Fiscal Impact
Public investment expanded by 1.2% QoQ, driven by infrastructure projects aligned with the government’s economic revitalization plans. However, fiscal stimulus measures implemented earlier in 2025 showed diminishing returns, with analysts cautioning that sustained growth would require private sector-led momentum.

Comparisons to Prior Periods
The Q2 growth rate contrasted sharply with the 0.2% decline in Q1 2025, which had been attributed to temporary factors such as supply chain disruptions and adverse weather. On an annualized basis, the economy grew 2.4%, outpacing the 0.8% annualized contraction in Q1. The rebound aligns with the Bank of Japan’s (BOJ) projections of a gradual recovery but falls short of some private-sector forecasts anticipating stronger rebound.

Market Reactions and Forecasts
The data reinforced expectations that the BOJ may maintain its accommodative monetary policy stance for the near term. While the central bank has signaled a gradual exit from ultra-loose policies, the latest figures suggest no immediate shift. Financial markets had priced in a 0.4% QoQ growth rate, leading to a mixed reaction as investors weighed the positive domestic trends against persistent external headwinds.

Looking ahead, analysts highlighted risks such as slowing global trade, potential labor shortages, and geopolitical tensions. The BOJ’s next policy review in July will likely focus on balancing inflation targets with economic stability. Meanwhile, the government’s focus on digital transformation and green energy initiatives aims to bolster long-term productivity.

Sectoral Performance
The services sector, including tourism and hospitality, grew by 1.1% QoQ, benefiting from domestic travel incentives and easing pandemic-related restrictions. Manufacturing output, however, contracted by 0.1% QoQ, reflecting reduced demand for electronics and industrial equipment. The agricultural sector saw a 0.5% increase, supported by favorable weather conditions.

Household and Business Sentiment
Household sentiment improved slightly, with consumer confidence rising to a six-month high, driven by employment stability. Business sentiment, as measured by the Tankan survey, remained positive but showed moderation in expectations for the next quarter, citing ongoing supply chain challenges and cost pressures.

Conclusion
Japan’s Q2 GDP report signals a modest recovery, with domestic demand proving resilient despite external pressures. The results provide a cautious foundation for policymakers aiming to sustain growth amid global volatility. However, achieving sustained expansion will depend on resolving structural challenges, such as labor constraints and export competitiveness, while navigating an uncertain global economic landscape.