Japan's economy grows faster in fiscal Q1 as consumer spending and inventories boost GDP

Japan’s economy expanded at a stronger pace in the fiscal first quarter than first estimated, the Cabinet Office said Monday, as consumer spending and inventory accumulation lifted growth despite external and political concerns.

The government revised real gross domestic product to a seasonally adjusted 2.2% annualized rate for April through June, up from a preliminary 1.0% estimate released last month. On a quarter-on-quarter basis, GDP rose 0.5%, revised up from an initial 0.3% increase.

The upward revision reflected stronger-than-expected private consumption and a bigger contribution from inventories. Private consumption rose 0.4% in the quarter, larger than the 0.2% gain reported in the preliminary data, which moved domestic demand into positive territory at 0.2% growth instead of the 0.1% contraction indicated earlier.

The revised figures mark a fifth straight quarter of growth for the export-dependent economy. The Cabinet Office’s annualized rate shows what the quarterly pace would equate to over a full year if sustained.

Policy and market watchers flagged risks that could weigh on future growth. U.S. tariffs raised by President Donald Trump on Japanese imports, including a hike to 15% for autos from 2.5%, pose a direct challenge to Japan’s carmakers and could damp export momentum. Domestic political uncertainty also surfaced over the weekend when Prime Minister Shigeru Ishiba announced he would step down as head of the ruling party, prompting a party leadership election in the weeks ahead.

Equity markets responded positively to the data and the leadership move. Japan’s benchmark Nikkei index rose in morning trading, a reaction some market participants said reflected relief that the resignation was expected and could clear the way for political realignment. Still, analysts cautioned that uncertainty over potential coalition partners and the course of party politics could keep markets and business sentiment on edge.

Analysts at RaboResearch had projected a 0.3% quarter-on-quarter rise prior to the revision. Economists monitoring the outlook said near-term growth will hinge on whether domestic consumption holds up, how companies manage inventories, and the trajectory of trade measures and political developments. The Cabinet Office plans further releases of detailed sector and industry breakdowns that may shed more light on which components sustained the revised growth rate.