Japan beats GDP forecasts, recovery gains steam — until West Asia energy shock hits – Firstpost

Japan’s economy expanded faster than expected in the first quarter of 2026, buoyed by resilient consumer spending, stronger exports and steady business investment, though the momentum is increasingly at risk from the energy shock unleashed by the conflict in West Asia.

Government data released on Tuesday showed Japan’s real gross domestic product (GDP) grew at an annualised 2.1 per cent in the January-March quarter, comfortably beating the median market forecast of 1.7 per cent growth.

The reading also marked an improvement from the revised 0.8 per cent expansion recorded in the October-December quarter, signalling that the world’s fourth-largest economy had entered 2026 on firmer footing than many analysts had anticipated.

On a quarter-on-quarter basis, the economy grew 0.5 per cent, ahead of expectations for a 0.4 per cent increase and stronger than the 0.3 per cent growth logged at the end of last year.

The latest figures suggest Japan’s long-fragile recovery was gaining traction before the Iran war triggered severe disruptions in global energy markets.

Private consumption — which makes up more than half of Japan’s GDP — rose 0.3 per cent during the quarter, slightly above forecasts of a 0.2 per cent increase, reflecting relatively stable household demand despite persistent inflationary pressures.

Business spending also remained resilient, with capital expenditure rising 0.3 per cent, beating expectations for a 0.2 per cent gain.

External demand provided an additional boost, with net exports contributing 0.3 percentage point to GDP growth, compared with expectations for a 0.2 percentage point contribution.

Yet economists cautioned that the upbeat first-quarter data does not fully reflect the economic damage from the escalating conflict in West Asia, which intensified after Iran effectively shut the Strait of Hormuz following US-Israeli attacks that began on February 28.

The closure of the vital energy shipping corridor has sent oil prices soaring and heightened fears of prolonged supply disruptions, posing a major threat to import-dependent economies such as Japan.

Japan relies heavily on crude imports from West Asia, making it particularly vulnerable to rising fuel prices that are already pushing up inflation and eroding household purchasing power.

The growing energy shock has forced the Bank of Japan (BOJ) to reassess its policy stance after earlier signals had fuelled market expectations of a possible interest-rate hike in June.

The central bank has since cut its fiscal 2026 growth forecast to 0.5 per cent from 1 per cent, while sharply raising its core inflation outlook to 2.8 per cent from 1.9 per cent.

At its May policy meeting, the BOJ warned that surging crude prices would likely weigh on corporate profits and real household incomes, slowing economic activity later this year.

“The rise in crude oil prices is expected to push up prices, mainly of energy and goods, with moves to pass on wage increases to selling prices continuing,” the BOJ said.

Analysts increasingly fear Japan could slip into a mild stagflationary environment marked by sluggish growth and persistently elevated inflation.

Inflation in Japan accelerated in March for the first time in five months, further complicating the BOJ’s balancing act between supporting growth and containing price pressures.

Meanwhile, the Japanese government is preparing fresh fiscal measures to shield households and businesses from the economic fallout of higher energy prices.

Reuters reported on Monday that Tokyo is likely to issue additional debt to fund an extra budget aimed at subsidising energy bills and cushioning the broader economy from the impact of the West Asia crisis.