Economic Performance - Japan's GDP grew by 1.2% year-on-year and 1.0% quarter-on-quarter in Q2, significantly exceeding economists' expectations of 0.4% growth [2] - The government revised Q1 GDP from a contraction of 0.2% to a growth of 0.6%, marking five consecutive quarters of growth [2] - The current five-quarter growth streak is the second longest in Japan's history, following an eight-quarter streak from Q3 2016 to Q2 2018 [2] Key Drivers of Growth - The "three engines" of growth—investment, consumption, and exports—are driving Japan's economic performance [2] - Private investment showed strong growth, with corporate capital expenditure rising by 1.3% quarter-on-quarter, surpassing the expected 0.7% [2] - The Bank of Japan's survey indicates that large companies plan to increase investment by 11.5% in FY2025, significantly higher than the previous estimate of 3.1% [2] Consumption Trends - Private consumption, which accounts for nearly 60% of Japan's GDP, grew by 0.2% quarter-on-quarter in Q2 [3] - Wage growth has been significant, with average wages increasing by 5.25% this year, the largest increase in 34 years [3] - The recovery in purchasing power is leading to a shift in consumption patterns, with service and high-end goods consumption growing faster than basic goods [3] Export Dynamics - Exports increased by 2% in Q2, contributing 0.3 percentage points to GDP, despite fears of U.S. tariffs [3] - The service sector, which constitutes 71.4% of GDP, achieved an annualized growth rate of 0.6% in Q2, supported by a booming tourism sector [3][4] - Japan welcomed 21.52 million international tourists in the first half of the year, a 21% increase year-on-year, contributing significantly to economic growth [4] Economic Outlook and Challenges - Economic forecasts for Q3 are pessimistic, with about 60% of economists predicting negative growth, averaging a decline of 0.1% quarter-on-quarter [6] - The Cabinet Office has lowered its growth forecast for FY2025 from 1.2% to 0.7% due to increasing economic pressures [6] - Structural imbalances are evident, with the manufacturing sector experiencing 13 months of contraction while the service sector continues to expand [7] Impact of U.S. Tariffs - U.S. tariff policies are significantly impacting Japan's exports, particularly in the automotive sector, which accounts for nearly 30% of total exports [8] - The forecast for export growth has been revised down from 3.6% to 1.2% for FY2025 due to the adverse effects of tariffs [9] - The Cabinet Office estimates that U.S. tariffs could lower Japan's actual GDP by 0.3 to 0.4 percentage points [9] Monetary Policy Considerations - The Bank of Japan has raised interest rates three times in the past year, but the current rate remains the lowest among major economies [10] - Inflation rates are a concern, with core inflation dropping from 3.7% to 3.1% as of July, yet remaining above the Bank's target of 2% [11] - The Bank of Japan is cautious about raising rates further, as it could exacerbate pressures on businesses already affected by rising costs and tariffs [12][13] Future Policy Directions - The Bank of Japan is considering domestic factors in its decision-making, aiming to balance economic growth and inflation control [14] - A potential rate hike may depend on continued investment expansion, stable core CPI around 3%, and the effectiveness of the wage-price spiral [14]