Tokyo [Japan], August 17 (ANI): Japanese Prime Minister Sanae Takaichi on Monday vowed to pursue a 'responsible active fiscal policy' and accelerate the government's growth strategy after Japan's economy expanded at an annualised 1.1 per cent in the April-June quarter, even as weak domestic demand and the fallout from the West Asia conflict weighed on the economy.

Japan's economy expanded for a second consecutive quarter, but the 1.1 per cent annualised growth was below the 2.0 per cent market expectation.

The quarter-on-quarter growth of 0.3 per cent was also below the 0.5 per cent forecast, with a 0.5 percentage-point boost from exports partly offset by a 0.2 percentage-point drag from weaker domestic demand.

Takaichi said in a post on X that the latest figures showed the economy continuing along a path of 'moderate recovery', while acknowledging the impact of the situation in West Asia and weakness in domestic demand.

''Today, the preliminary estimate for the 'Quarterly GDP for April-June 2026' was released. Even amid the influence of the Middle East situation, the 'real growth rate' came in at +0.3% quarter-on-quarter and +1.1% on an annualised basis, marking 'three consecutive quarters of positive growth'. While domestic demand turned negative due to special factors such as the 'increase in tobacco prices', external demand was positive, resulting in overall positive growth, and we believe that the economy continues to follow a trend of 'moderate recovery',' the Prime Minister said.

The latest government data showed that capital spending was the biggest drag on growth, falling 1.2 per cent during the quarter against market expectations for a 0.4 per cent increase. Private consumption was also weak, with households remaining cautious amid rising living costs.

Takaichi also highlighted developments in wages and household incomes.

'In addition, the 'total real employee compensation' also rose +2.3% year-on-year and +0.9% quarter-on-quarter, remaining firmly on a steady path,' she added.

Takaichi further stated that the outlook would be supported by improvements in employment and incomes, while stressing the need to monitor the impact of the West Asia situation.

'While it remains necessary to continue monitoring the impact of the Middle East situation, with real wages already positive for seven consecutive months, the outlook is expected to be supported by improvements in the employment and income environment--such as the 'wage increase rate from the spring labor-management negotiations,' which exceeded 5% for the third consecutive year--as well as the effects of various policies, thereby sustaining the economy's 'moderate recovery,' she stated.

The weakness in domestic demand comes against the backdrop of higher energy prices and uncertainty linked to the West Asia conflict. Japan, which relies heavily on imported energy, has faced additional pressure from disruptions affecting energy flows.

Against this backdrop, Takaichi said her government would focus on boosting investment and productive capacity.

'Under the Takaichi Cabinet, guided by the philosophy of 'responsible active fiscal policy,' we will vigorously promote the 'Japan Growth Strategy' and 'Regional Future Strategy'--initiatives to be pursued by both government and private sectors based on 'Bone Ta 2026'--in order to expand 'domestic investment,' strengthen 'supply capacity,' raise the 'potential growth rate,' and thereby realize a 'strong economy',' the post added.

The latest GDP figures underscore the challenge for the government, with external demand providing support while domestic demand remained weak. Exports rose 0.5 per cent in the April-June quarter, while government consumption rose 1.6 per cent.

Takaichi said the government would also move swiftly on measures aimed at addressing higher prices and supporting the economy.

'To that end, we will swiftly and steadily execute measures against high prices included in the FY2025 supplementary budget, the initial FY2026 budget, and the FY2026 supplementary budget, while flexibly responding to various risks, to ensure a reliable transition to a 'growth-oriented economy' that does not revert to deflation,' she stated.

Japan's trade data had earlier highlighted the impact of the conflict, with crude oil imports plunging 57.3 per cent in volume to 4.73 million kilolitres as disruptions to shipping through the Strait of Hormuz affected energy flows.

In May, Japan recorded a trade deficit of around USD 2.34 billion, with exports rising 17.0 per cent year-on-year to 9.51 trillion yen, supported by strong demand for semiconductors, electronic components and motor vehicles. Imports increased 12.5 per cent to 9.89 trillion yen, driven by higher purchases of communication equipment.

Earlier in May, the Bank of Japan had raised its short-term policy rate to 1 per cent from 0.75 per cent. The apex bank also marginally raised its GDP growth forecast for fiscal 2026, ending March 2027, to 0.6 per cent from 0.5 per cent in its economic activity outlook.

The latest figures therefore present a mixed picture for Takaichi's growth agenda, with the economy continuing to expand but domestic demand and business investment remaining areas of weakness. (ANI)