Japan’s economy has delivered a stronger-than-expected performance in the second quarter of 2025, outpacing forecasts and offering a rare bit of good news amid an uncertain global trade environment and political turbulence at home. According to government data released Friday, gross domestic product (GDP) expanded at an annualized rate of 1%, more than double the 0.4% median forecast by economists polled by Reuters, and marking the fifth consecutive quarter of growth. The quarterly gain stood at 0.3%, above the 0.1% estimate and up from a revised 0.1% in the previous quarter.
This surprise uptick, reported by Reuters and the Japanese Cabinet Office, comes despite the headwinds of newly imposed U.S. tariffs and persistent inflation. The growth was driven primarily by robust exports and a surge in business investment, which rose 1.3% from the previous quarter—well above consensus expectations. Private consumption, which accounts for more than half of Japan’s economic output, edged up 0.2%, matching the previous quarter’s pace. Exports themselves grew by 2.0% in the period, buoyed in part by a rush to beat impending higher tariffs and a glut of international tourists flocking to the country.
Japan’s trade deficit also narrowed from April to June, compared to the first quarter, according to the country’s trade ministry. The Nikkei 225 benchmark index rose 0.59% on the news, and the yen ticked up slightly, trading at 147.6 against the dollar. This economic resilience stands in stark contrast to China, where factory output growth has recently hit an eight-month low and retail sales have slowed sharply.
The positive data, however, come with a heavy dose of caution. Economists warn that the apparent strength may mask deeper vulnerabilities. Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute, told Reuters, “The April-June data masked the real effect of Trump’s tariffs. Exports were strong thanks to solid car shipment volumes and last-minute demand from Asian tech manufacturers ahead of some sectoral tariffs. But these aren’t sustainable at all.”
The United States imposed a 25% tariff on Japanese automobiles and auto parts in April, with threats of similar levies on other imports. A trade deal struck in July lowered tariffs to 15% in exchange for a $550 billion Japanese investment package in the U.S. Auto exports to the U.S. remain a cornerstone of Japan’s economy, accounting for 28.3% of all shipments in 2024, as reported by customs data. During the second quarter, Japan was spared a 24% tariff that had been announced on "Liberation Day" but still faced 25% duties on its vital automobile sector.
Government officials have acknowledged the risks. Japanese economy minister Ryosei Akazawa said in a press conference that the latest GDP results confirmed a modest recovery, but warned, “We need to be mindful of downside risks from U.S. trade policies.” The government has already cut its inflation-adjusted growth forecast for this fiscal year to 0.7%, down from an initial projection of 1.2%, citing the likely drag from U.S. tariffs and ongoing inflationary pressures. Akazawa further estimated that the tariffs could push down Japan’s real GDP by 0.3 to 0.4%.
Adding to the uncertainty, persistent inflation continues to weigh on consumer sentiment. Prices have been rising steadily, while wage growth has lagged behind, leading to only a modest uptick in consumer spending. Some economists, like Shinichiro Kobayashi of Mitsubishi UFJ Research and Consulting, believe that private consumption will be key for a full recovery. “For the economy to fully pick up, private consumption holds the key. Consumption could improve towards the end of the year as inflation gradually slows and sentiment recovers,” Kobayashi explained to Reuters.
Business investment, meanwhile, has been a bright spot. Demand for digital and labor-saving technologies remains strong, even as companies brace for a potential decline in profits due to tariffs. Marcel Theliant, Head of Asia Pacific at Capital Economics, noted in a Friday research note that Japan was “shrugging off U.S. tariffs,” but he cautioned that the rebound was “stronger than anticipated” and predicted a renewed slowdown in coming quarters as investment spending softens and exports begin to decline.
Tourism has also played a significant role in propping up the economy, with a surge in visits from abroad contributing to the export figures. However, this influx has not been universally welcomed, with some Japanese expressing frustration over the challenges of accommodating so many outsiders, as reported by AP.
Politically, the economic results offer some relief to embattled Prime Minister Shigeru Ishiba, whose ruling coalition recently lost its majority in the upper house of parliament, partly due to widespread frustration over the rising cost of living. The tariffs imposed by U.S. President Donald Trump have added to the pressure on Ishiba to deliver results, especially as the higher import duties are intended to push Japanese companies to increase manufacturing in the United States. The government’s recent trade deal with the U.S. sets the car levies at 15%, the same as the current baseline rate, once Washington adjusts executive orders in line with the late July agreement.
The Bank of Japan (BOJ) has taken note of the unexpected resilience. After its July 31 meeting, the central bank upgraded its growth forecast for the 2025 fiscal year to 0.6%, up from the 0.5% projected in April. BOJ Governor Kazuo Ueda indicated that borrowing costs would continue to rise if domestic demand remains steady. While the BOJ is expected to hold its policy steady at its next meeting in September, a growing number of economists—42% in a recent Bloomberg survey—anticipate a rate hike as early as October. Atsushi Takeda, chief economist at Itochu Research Institute, remarked, “I had been expecting a rate hike in October, and I feel like the chances of that have gone up a bit. The market consensus also seems to be shifting toward an earlier hike now.”
Still, the outlook for the rest of the year is fraught with uncertainty. With the window for front-loading exports now closed and the full impact of tariffs yet to be felt, the third quarter may bring a sharper slowdown. Hiromu Komiya, economist at the Japan Research Institute, observed, “Even amid all the uncertainty surrounding U.S. tariffs, business investment has also been growing steadily.” But with persistent inflation and the possibility of tariffs affecting bonuses and wage increases in 2026, as noted by Masato Koike at Sompo Institute Plus, the current upward trend in personal consumption may be short-lived. Koike warned that a significant downturn could even tip Japan into recession, depending on the ultimate impact of the tariffs.
For now, Japan’s economy has managed to sidestep the worst of the global trade storm, buoyed by last-minute export surges, resilient business investment, and a wave of foreign tourists. But as the dust settles and the true effects of protectionist policies take hold, the world’s fourth-largest economy faces a critical test in the months ahead.
