Japan’s economy slowed sharply in the second quarter but will still eke out some growth, thanks to the nation’s consumers.

That’s the result economists expect when preliminary gross domestic product data are released Friday. GDP grew at an annualized rate of 0.5% in the second quarter from the previous three months, according to economists surveyed by Bloomberg. That’s down from a deceptively strong 2.2% in the first quarter.

Private consumption, given a lift by a 10-day public holiday, was one of the growth drivers in the quarter, while exports were a drag, economists say.

“Consumer spending was stronger than I had expected,” said Kazuma Maeda, economist at Barclays Securities, who cited the long holiday and purchases of electronic appliances ahead of a sales-tax increase set for October.

Barclays forecast a 0.5% gain in private consumption during the second quarter, after a 0.1% contraction in the first.

Growth could continue in the third quarter if consumers keep buying goods to beat the tax increase, although “front-loading” isn’t likely to be as big as it was before the last hike in 2014, when a subsequent slump led to a severe GDP contraction.

This time around, Prime Minister Shinzo Abe’s government has lined up a series of measures to level out consumption before and after the increase.

Japan’s Looming Sales Tax Hike Prompts Less Rush Demand So Far

There are plenty of risks. An escalating U.S.-China trade war and a slowdown in China’s economy are big concerns, with Japanese exports already down for seven straight months. A rapidly strengthening yen is also a problem.

“The outlook for domestic demand hinges upon whether an external shock will weigh on production and jobs,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group.

If the U.S.-China fight drags on, “a very deep” economic contraction will be unavoidable in the fourth quarter, Shirakawa said.

What Bloomberg’s Economists Say

“Fiscal stimulus and last-minute purchases ahead of a sales-tax hike in October are likely to support growth in 3Q. That said, growth will hinge on how well external demand holds up and U.S. protectionism play out.”—Asia Economist TeamClick here to read the report.

The yen’s recent surge has again shown how vulnerable Japan is to such shocks. The currency tends to strengthen in times of turmoil. A stronger yen not only makes Japanese exports less competitive, but also cuts into exporters’ profits.

If yen strength is prolonged, companies may refrain from raising wages or boosting capital investment.


Capex has held up so far, thanks partly to investment in labor-saving technology, and is expected to have supported growth in the second quarter. Economists surveyed by Bloomberg forecast a 0.8% gain in capex from the previous period, when it rose 0.3% and contributed 0.1 percentage point to GDP.

“We expect growth in capex to remain robust owing to investments in labor-saving and automation technology in response to Japan’s population trends,” Morgan Stanley MUFG Securities Co. said in a recent report.

Industrial production hasn’t fared as well. It slumped 2.5% in the first quarter from the previous three months, but rose 0.5% in the second, according to the economy ministry.

Factory output fell a worse-than-expected 3.6% in June to the lowest level since January 2017, indicating weakening external demand is still taking a toll.