Japan Growth Beats Forecasts, Boosting Rate-Hike Case for BOJ

Shoppers in the Harajuku district of Tokyo. Photographer: Shoko Takayasu/Bloomberg

(Bloomberg) -- Japan’s economy expanded faster than expected last quarter led by solid domestic demand, boosting the case for the Bank of Japan to raise its benchmark rate again this year while giving embattled Prime Minister Shigeru Ishiba some rare good news.

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.

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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.

Signs of stronger than expected resilience in the economy will likely encourage views that the central bank will hike again this year. 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.

“I had been expecting a rate hike in October, and I feel like the chances of that have gone up a bit,” said Atsushi Takeda, chief economist at Itochu Research Institute. “The market consensus also seems to be shifting toward an earlier hike now.”

What Bloomberg Economics Says...

“Japan’s surprisingly strong second-quarter GDP bolsters the Bank of Japan’s case for a near-term rate hike, providing evidence that domestic demand is holding firm despite higher US tariffs.”

— Taro Kimura, economist

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The yen strengthened immediately after the GDP release, gaining as much as 0.3% versus the dollar, the most among major currencies on Friday. Japanese shares rose, led by a 4% increase in the Topix Banks Index. Financial stocks are benefiting from bets that a rate hike from the BOJ may come sooner rather than later, helping to boost their profitability.

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.

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“Even amid all the uncertainty surrounding US tariffs, business investment has also been growing steadily,” Hiromu Komiya, economist at the Japan Research Institute, said.

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 costs of living. Ishiba has so far rejected calls from within his party to resign.

Despite global trade headwinds, corporate spending remained firm, consistent with the BOJ’s latest Tankan survey that showed large companies plan to boost investment by 11.5% this fiscal year, up from a previously estimated 3.1%.

Private spending, which makes up nearly 60% of GDP, picked up a tad more than expected despite prolonged inflation. Previously released data showed that household outlays rose in both May and June, in a sign of resilience. The uptrend was partly aided by solid wage gains from this year’s pay negotiations, which have been gradually showing up in paychecks.

Net exports contributed 0.3 percentage point to growth. Despite heavier US tariffs, exports held up in real terms, rising 2% from the prior period 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.

“The key here is exports,” said Takeda. “The most important thing for the BOJ is to assess how exports trend from July onward.”

As for personal consumption, wage gains pledged for workers at the nation’s largest companies exceeded 5% this year, surpassing the pace of inflation. That could sustain spending in coming months, according to Komiya.

“On the consumer side, we’re expecting real wages to start picking up in the fall, and that should give households a bit more strength going forward,” he said.

--With assistance from Mia Glass and Brett Miller.

(Updates with economists’ comments and market reaction.)

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