Japan's economy grows for a third quarter in a row but only half as fast as expected

The Japanese economy grew by 0.3 percent in the second quarter of 2026 against the previous quarter. That comes from preliminary government data published on Monday.

Economists had expected 0.5 percent. In the first quarter growth had also come in at 0.5 percent.

It is the third quarter in a row with a gain. The data name weaker spending by households and companies as the reason for the slowdown. Exports supported growth.

Despite the slower pace the figures suggest that the Japanese economy has not lost much momentum yet. That holds even with the higher oil prices caused by the crisis in the Middle East, which weigh directly on a country poor in raw materials.

The short version

• Japan's economy grew 0.3 percent in the second quarter of 2026 against the previous quarter, while economists had expected 0.5 percent.
• It is the third quarter in a row with a gain, held back by weaker spending from households and companies.
• The Nikkei 225 closed at 68,308.59 points on 13 August, and the Topix reached a record close at 4,176.04 points.

Bond yields jump

Alongside the economic data the Japanese bond market moved sharply. Yields on long dated government paper jumped.

Japanese shares mostly weakened in response. Together the two moves describe a situation that was untypical for Japan over decades. The country had kept extremely low interest rates, which made the yen the preferred funding currency for investors who borrowed cheaply and put the money into higher yielding assets abroad.

If Japanese rates rise, that construction becomes more expensive. Positions are unwound and the yen appreciates. A stronger yen in turn shrinks the foreign earnings that exporters book in yen, and exporters make up a large part of the equity market.

A rate rise is therefore rarely good news for the Japanese stock market, however well founded it may be in economic terms.

Bonds from the region are in demand

Demand from abroad stands out. Bonds from the Asia Pacific region are sought after at present, among them paper issued by foreign borrowers in the respective local currencies.

For the region as a whole the week is restless. In South Korea the exchanges were closed on Monday for the national liberation holiday. From China, retail sales and industrial production for July were due in the morning.

Indian banks are speeding up their dollar funding, according to reports, after the central bank there brought forward a deadline for a foreign exchange swap window.

A contrast with the spring records

The current figures stand in contrast to the record levels the Japanese stock market has reached this year. On 13 August the Nikkei 225 closed at 68,308.59 points, up 1.16 percent, while the broader Topix reached a record close at 4,176.04 points for the second time in a row.

That recovery was carried by semiconductor shares and not by the domestic economy. Exactly this split explains how an index can reach highs while economic output grows more slowly than expected.

The swings of the year have been considerable. On 11 June the Nikkei closed at 64,179 points, down 1.9 percent, and on 10 August at 66,970.22 points, up 2.08 percent.

For the coming days market participants expect direction mainly from further economic data out of Japan and China and from an American industrial indicator. Monday also brought the Empire State index and the NAHB housing market index from the United States as well as the monthly report of the Bundesbank.

Frequently asked questions

How fast did Japan's economy grow in the second quarter of 2026

Gross domestic product rose by 0.3 percent against the previous quarter, according to preliminary government data. Economists had expected 0.5 percent, and in the first quarter growth had also come in at 0.5 percent. It is therefore the third quarter in a row with a gain.

Why was growth weaker than expected

The data name weaker spending by private households and companies as the reason. Exports on the other hand supported growth. The higher oil prices caused by the crisis in the Middle East also weigh directly on a country as poor in raw materials as Japan.

Why are rising interest rates bad for Japanese shares

Japan kept extremely low interest rates for decades, which made the yen the preferred funding currency. When rates rise, that construction becomes more expensive, positions are unwound and the yen appreciates. A stronger yen shrinks the foreign earnings that exporters book in yen, and exporters make up a large part of the equity market.

Why do the record highs contradict the economic data

The recovery on the Japanese stock market was carried by semiconductor shares and not by the domestic economy. The Nikkei 225 closed at 68,308.59 points on 13 August, up 1.16 percent, and the Topix reached a record close at 4,176.04 points. An index can therefore hit highs while economic output grows more slowly than expected.

This analysis is for information only and is not investment advice.