Japan Macro Information

17 August 2026 Fixed Income | Japan Macro Information

2Q 2026 GDP: Third straight quarter of positive growth, but some devil in the details

Ryosuke Katagi Market Economist Overview The first preliminary estimates for 2Q 2026 show real GDP growing 0.3% QoQ or 1.1% annualized to mark a third successive expansion, but the details left something to be desired given that so much was ultimately due to positive contributions from private inventories as well as a sharp fall in imports as the Iran situation continued to take its toll. Domestic demand actually ended up subtracting from growth, with private consumption, private nonresidential investment, and private residential investment all down from 1Q. We were particularly surprised to see private consumption drop for the first time in eight quarters (after having envisaged another solid result), and consider this the main reason for overall growth having come in so far below the Bloomberg consensus forecast of +0.5% QoQ (+2.0% annualized). There in any case now appears to be some modest cause for concern vis-à-vis the economic outlook, although we do not expect this to significantly reduce the likelihood of an acceleration in the pace of BOJ rate hikes.

Elevated crude oil prices will quite likely continue to weigh on private consumption, but we consider a dramatic downturn unlikely given that real wage growth should meanwhile remain in positive territory (albeit perhaps only barely). Private nonresidential investment should in the meantime start rising once again with support from voracious AI-related demand, and exports also look likely to stay strong with the semiconductor sector among the biggest contributors. Our main scenario is accordingly for overall growth to remain slightly north of "potential".

Key points ◇ Private consumption (down -0.0% QoQ) First contraction in eight quarters despite positive contributions from durable goods (+2.8% QoQ) and semi-durables (+1.1%).

Factors behind the strength of spending on durable goods are likely to have included (1) a rebound in motor vehicle sales due to an environmental performance-based tax having been scrapped with effect from April and (2) frontloaded demand for air conditioners ahead of new environmental standards kicking in from April 2027. Spending meanwhile dropped a quite sizable 1.8% for non-durables and was also 0.1% lower for services to mark the first decline in six quarters.

Employee compensation accelerated to +2.2% YoY (versus +1.4% in 1Q 2026) in inflation- adjusted terms, marking a ninth successive increase as support from the government's various energy price controls seemingly helped to limit fallout from the Middle East situation. The basic picture thus appears to be one of an improving income environment helping to shore up spending even as consumer sentiment has been significantly depressed by the ongoing Iran conflict.

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◇ Private residential investment (down -0.5% QoQ) This slight decline followed increases of 5.0% QoQ for 4Q 2025 and 0.9% for 1Q 2026 and suggests that we might no longer be seeing all that much of a rebound from the earlier decline attributable to revisions to the Building Standards Act having taken effect from April 2025.

◇ Private non-residential investment (down -1.2% QoQ) A second successive contraction after quite respectable growth for 4Q 2025 (+1.3% QoQ), with supply-side statistics indicative of negative contributions from "other buildings and structures" and "other machinery and equipment" (although we will have to wait for the second preliminary estimates for the breakdown of "gross capital formation classified by type"). It would thus appear that continued uncertainty pertaining to the Iran situation may have depressed corporate capex to at least some degree. The June Tankan results were however indicative of investment appetites remaining generally solid (albeit with some…