Japan's economy expanded at a 2.1% annualized rate in the first quarter, beating analyst forecasts of 1.7%. The growth came from stronger-than-expected consumption and a surge in exports, particularly semiconductor equipment shipments that jumped 29.3% year on year in March.
But the upbeat numbers mask an economy bracing for a slowdown. The Bank of Japan cut its growth forecast for fiscal 2026 to 0.5% from 1% and raised its inflation outlook to 2.8% from 1.9%—both sharp reversals. The culprit: crude oil prices spiking since the Iran war began in late February. That first-quarter GDP does not capture the full impact of the conflict, which hit markets after the quarter ended.
Energy costs and spending pressure
Higher fuel costs are narrowing margins. The BOJ warned that crude oil increases will crimp corporate profits and real household incomes. Inflation in Japan accelerated in March for the first time in five months. The central bank expects energy and goods prices to rise as companies pass on wage increases to consumers.
Tokyo is preparing to absorb some of that shock itself. Japan is likely to issue fresh debt for an extra budget to cushion the economic blow from the Middle East war as the country subsidizes energy bills. Economists see a sharp deceleration ahead—gains in exports from strong semiconductor demand offer only short-term relief against sustained headwinds from uncertainty and elevated energy prices.
