Apr-Jun Prelim GDP Preview: Terms-of-Trade Deterioration Weighs on Nominal Growth

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July 31, 2026 03:28 PM GMT

Japan Economics | Japan

Morgan Stanley MUFG Securities Co., Ltd.

Takeshi Yamaguchi

Chief Japan Economist

Apr-Jun Prelim GDP Preview:

Terms-of-Trade Deterioration

Weighs on Nominal Growth

Masayuki Inui

Economist

Key Takeaways

Positive real growth likely to continue, although public inventories remain a

source of uncertainty

Nominal growth likely to slow, but terms-of-trade deterioration smaller than

initially expected

Positive real growth likely to continue, although public inventories remain a

source of uncertainty: We forecast real GDP growth in the preliminary 2Q GDP

release, due on August 17, at +1.7% QoQ annualized, marking the third consecutive

quarter of positive growth. Despite the impact of developments in the Middle East,

private consumption likely remained resilient, supported by government measures

such as gasoline subsidies. That said, our GDP forecast for the quarter is subject to

greater-than-usual uncertainty, as we expect public inventories, which typically show

little movement, to make a negative contribution due to the drawdown of

government crude oil reserves (note: we estimate this contribution at -0.4ppt QoQ).

For details by demand component, see Exhibit 1 .

Nominal growth likely to slow, but terms-of-trade deterioration smaller than

initially expected: We expect nominal GDP growth to slow to the 1% range from an

average annualized pace of around 3% over the past two quarters, reflecting a sharp

deterioration in the nominal trade deficit due to worsening terms of trade. However,

strong global AI-related demand has driven a substantial rise in export prices,

partially offsetting the increase in import prices associated with higher crude oil

prices. As a result, the deterioration in the terms of trade has been smaller than we

initially expected. In our mid-year outlook published in May, we had seen a

possibility that nominal GDP growth could temporarily turn negative in 2026. We

now believe the likelihood of nominal growth remaining positive has increased.