Japan’s economy grew faster than expected at the start of 2026, official data showed on Tuesday, but Prime Minister Sanae Takaichi is weighing a supplementary budget as rising inflation tied to the Middle East war clouds the outlook.
Cabinet Office figures showed gross domestic product expanded 0.5 percent in the first quarter, ahead of market forecasts of 0.4 percent. The gain was driven by stronger private consumption and corporate investment. The reading follows 0.2 percent growth in the fourth quarter of 2025, revised down from an earlier 0.3 percent estimate.
With consumer prices climbing for items from energy to rice amid the Iran war, Takaichi is preparing a draft extra budget intended to protect growth. Government spokesman Minoru Kihara said the prime minister has asked the finance minister to explore measures to reduce economic risk and that officials are watching price trends closely.
Analysts warned the conflict will weigh on future data. Marcel Thieliant of Capital Economics said Japan entered the Iran war with momentum but expects GDP growth to stall in the current and next quarters. He noted government subsidies have so far blunted higher oil costs, but Japan—reliant on the Middle East for about 95 percent of its oil—will likely feel full effects in coming months, hurting consumer confidence.
The Bank of Japan raised its inflation forecast to 2.8 percent for the current fiscal year from 1.9 percent previously, and lifted next year’s outlook to 2.3 percent from 2.0 percent. The BOJ also cut its fiscal 2026 growth forecast to 0.5 percent from 1.0 percent and trimmed next year’s projection to 0.7 percent from 0.8 percent, moves that could pave the way for interest-rate increases as soon as June.
Taro Saito of the NLI Research Institute warned that logistics disruptions and worsening terms of trade from surging crude prices will squeeze corporate profits and household purchasing power. Expectations of monetary tightening and uncertainty over fiscal policy have pushed up Japanese government bond yields recently.
Authorities have spent tens of billions of dollars in markets to support the yen, which has weakened amid global uncertainty and a widening interest-rate gap with the United States. A softer yen raises import costs for energy and food, adding to inflationary pressure.