Japan's economy grew at an annualized 1.1% in the second quarter of 2026, slowing as the Iran war weighed on business investment and consumer spending. The pace is in line with the modest growth rates that have characterized the world's fourth-largest economy for years, and the quarterly figures are among the most closely watched indicators of whether that expansion can hold up while global risks persist.

Exports were a rare bright spot. Net external demand added 0.5 percentage points to growth, supported by strong U.S. demand for Japanese hybrid vehicles and global investment in artificial intelligence. Both channels play to established strengths: Japanese automakers have leaned on hybrid sales as U.S. buyers gravitate toward the technology, and Japan is a major global supplier of chipmaking equipment and electronic components tied to the AI build-out.

The data showed that while overseas demand helped cushion the economy, domestic activity remained under pressure during the quarter. Consumer spending, which accounts for more than half of Japan's GDP, weighs heavily on the headline number when it softens, and GDP readings are typically revised as more complete data arrive. That leaves the balance between resilient exports and weak domestic demand as the key question heading into the second half of the year.