Japan’s Q2 Growth Beats Forecasts Despite U.S. Tariff Pressure

Japan’s economy expanded by 0.3% in the second quarter of 2025 compared to the first three months of the year, surpassing expectations despite headwinds from U.S. tariffs. This followed a revised 0.1% GDP increase in the first quarter and exceeded the 0.1% growth forecast from economists surveyed by Reuters.

The primary driver was exports, contributing 0.3 percentage points to GDP growth, reversing a 0.8% contraction in the previous quarter. Trade Ministry data indicated that the April–June trade deficit narrowed from the prior period. On a year-on-year basis, GDP rose 1.2% in the second quarter, down from a 1.8% increase in the first quarter. For the full year, growth reached 1%, more than double the 0.4% projection.

Following the release, the Nikkei 225 gained 0.59%, and the yen strengthened 0.1% to 147.6 per dollar. The economy continued to face a challenging trade environment during the quarter, culminating in a July 23 trade agreement with the United States. Under the deal, all Japanese exports to the U.S., including automobiles, are subject to a uniform 15% tariff. Japan managed to avoid the 24% tariff announced on “Liberation Day,” though the automotive sector remains under a 25% levy.

Automobiles are a key export category, representing 28.3% of total shipments in 2024, according to customs data. Japan is able to withstand the effects of U.S. tariffs, according to Marcel Theliant, head of Asia-Pacific economics at Capital Economics. He issued a warning, though, that even though GDP growth was better than anticipated, momentum might slow in the upcoming quarters as a result of declining investment and a possible decline in exports.

On July 31, the Bank of Japan raised its growth forecast for fiscal 2025 (April 2025–March 2026) to 0.6% from 0.5%, while warning that trade policy shifts and global economic conditions could erode overseas demand and reduce domestic corporate profitability.

Masato Koike, senior economist at Sompo Institute Plus, described a prevailing “sense of stagnation” in the outlook. He expects personal consumption to rise on the back of real wage gains from recent pay increases but warned that if tariffs weigh on bonuses and wages in 2026, this momentum could fade. Although there is still a strong demand for investments in labor automation and digital technology, Koike warned that declining corporate profits due to tariffs may severely limit capital spending, raising the possibility of a recession depending on how severe the effects of the tariffs are.