Japan's gross domestic product grew 0.5% from January to March 2026, representing an annualized growth rate of 2.1%, the highest quarterly increase in recent periods and exceeding market expectations of around 0.4% quarterly growth [1, 2, 3]. The rise followed a 0.3% expansion in the final quarter of 2025 [3].
Analysts had predicted more modest growth earlier in the year. "A very light stagflation-like situation could happen this year" for Japan, said Shigeto Nagai, head of Japan economics at Oxford Economics [3]. The Bank of Japan trimmed its 2026 fiscal year GDP growth forecast to 0.5% from 1% but simultaneously raised its core inflation outlook to 2.8% from 1.9%, reflecting rising price pressures amid gains in crude oil costs [3].
The ongoing conflict in the Middle East, which began in late February 2026, is expected to weigh on Japan’s economy in the second quarter and beyond. The war has driven up crude oil prices, pushing energy and goods prices higher in Japan [2, 3]. Policymakers are preparing to respond. Reuters reported Tokyo is likely to issue fresh government debt to fund an extra budget aimed at cushioning the war’s economic impacts [3].
GDP growth in the first quarter outpaced previous quarter estimates that foresaw only 0.4% expansion, indicating stronger than anticipated domestic demand or exports [3]. However, uncertainty over external spillovers from the geopolitical crisis clouds near-term prospects.
Japan’s next key economic update is expected in the coming weeks once second-quarter data is released, along with details on government fiscal plans to mitigate the fallout from rising import costs and inflationary pressures.
