Japan's economy grew at an annualized rate of 2.1% in the first quarter of 2026, exceeding analysts' expectations of 1.7% and improving from 1.3% in the previous quarter. On a quarter-on-quarter basis, the economy expanded by 0.5%, surpassing the forecast of 0.4% and up from 0.3% at the end of 2025. Year-on-year, GDP growth was recorded at 0.6%.
However, these figures do not fully account for the economic impact of the ongoing Iran war, which began in late February. The Bank of Japan has revised its growth forecast for the fiscal year 2026 down to 0.5% from 1%, while raising its core inflation outlook to 2.8% from 1.9%.
The central bank has indicated that rising crude oil prices due to the Middle East crisis could negatively affect corporate profits and real household incomes, potentially leading to a stagnation scenario. Shigeto Nagai from Oxford Economics warned of a possible stagflation-like situation, noting that real disposable incomes have been negative for some time.
The Bank of Japan also highlighted that the increase in crude oil prices is likely to elevate costs for energy and goods, with businesses passing on wage increases to consumers. Additionally, Tokyo is expected to issue new debt to support an extra budget aimed at mitigating the economic fallout from the conflict in the Middle East, particularly as the government subsidizes energy bills