Japan Q2 GDP growth undershoots forecasts, complicating BOJ's hike timeline

Japan’s preliminary Q2 GDP data disappointed, with growth of just 0.3% q/q versus 0.5% expected and annualized growth of 1.1% versus 2.0% forecast. The weak print, driven by flat private consumption and a 1.2% drop in capital expenditure, suggests domestic demand is softening just as the Bank of Japan weighs further policy normalization. While external demand contributed a better-than-expected 0.5 percentage points and exports rose 0.5%, the overall message is that Japan’s recovery remains fragile. The data likely eases near-term pressure for a BOJ rate hike, which could weigh on the yen and support Japanese equities, while reducing expectations for tighter policy may also pressure JGB yields lower. Inflation remains elevated, with the GDP deflator up 2.6% y/y, leaving policymakers stuck between weak growth and persistent price pressures.