Media365
Japan has cut its economic growth forecast for the current fiscal year, warning that higher imported energy costs driven by tensions in West Asia are weighing on household spending and business profits, underscoring the vulnerability of the world’s fourth-largest economy to global oil price shocks.
In its mid-year economic outlook released on Thursday, the Cabinet Office projected inflation-adjusted gross domestic product (GDP) growth of 0.9 per cent for the fiscal year ending March 2027, down from the 1.3 per cent expansion it forecast in January.
The downgrade comes as elevated crude oil prices have increased import costs for resource-poor Japan, squeezing consumers through higher utility bills and lifting costs for businesses.
Despite the weaker near-term outlook, the government expects the economy to regain momentum in the following fiscal year, forecasting GDP growth of 1.1 per cent, supported by stronger capital investment and a recovery in private consumption.
Household spending takes a hit
Private consumption, which accounts for more than half of Japan’s economic output, is now expected to grow 0.9 per cent in fiscal 2026, down from the 1.3 per cent increase projected earlier this year.
Capital expenditure is also expected to slow, with business investment forecast to rise 2.3 per cent instead of the previously estimated 2.8 per cent.
The revised projections reflect the growing pressure on households from rising energy and living costs, even as wages continue to increase.
Consumer inflation is now expected to average 2.2 per cent during fiscal 2026, higher than the government’s January estimate of 1.9 per cent, largely due to more expensive imported fuel.
Wage growth to remain positive
The Cabinet Office said nominal wages are expected to rise by around 3.1 per cent annually through fiscal 2027, allowing real wage growth to remain positive despite persistent inflation.
Japan has seen stronger wage settlements over the past two years as companies respond to labour shortages and the Bank of Japan’s push for sustained wage-led inflation.
Officials hope higher incomes will eventually offset rising prices and support a broader recovery in consumer spending.
Fiscal outlook improves despite debt burden
The government also projected that Japan’s primary budget balance will return to a surplus of 1.4 trillion yen (about $8.6 billion) in fiscal 2027.
The estimate comes even as Tokyo has reduced its emphasis on achieving a primary budget surplus as its main measure of fiscal discipline.
Japan has run primary budget deficits for most of the postwar period, with the exception of the asset-price bubble years between 1986 and 1991. The country’s public debt remains the largest among developed economies, exceeding twice the size of its annual economic output.
Successive governments have repeatedly postponed targets to restore a primary budget surplus, a goal first introduced in the early 2000s.
The latest forecasts suggest that while Japan’s economy is expected to remain resilient, higher imported energy costs and geopolitical uncertainty continue to pose significant risks to growth in the near term.
