Japan’s economy grew less than initially expected in the first quarter of 2026, revised gross domestic product data showed on Monday, amid sluggish capital spending and continued headwinds from the Middle East war.
GDP grew 1.8% year-on-year in the three months to March 31, government data showed. The print was weaker than a prior reading of 2.1%, but was above Bloomberg estimates of 1.4%.
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Capital expenditure was the biggest weight on GDP, falling 0.7% quarter-on-quarter as heightened uncertainty over the economy, especially due to the Middle East war, saw businesses broadly scale back big spending.
The GDP downgrade was widely expected after a survey released last week showed capital spending largely stalled in Q1.
Momentum in growth also slowed after outsized spending on artificial intelligence infrastructure in recent quarters.
The Middle East war remained a major point of uncertainty, as energy prices remained high and threatened to underpin inflation in the coming months.
Still, Japan’s economy was underpinned by some strength in private consumption and export demand in Q1. But the Middle East war, which entered its fourth straight month in June, largely clouded the economic outlook.
The soft GDP print also raises questions over how much headroom the Bank of Japan has to hike interest rates when it meets next week. The central bank signaled it will discuss raising rates in the face of energy-driven inflation stemming from the Middle East war.
Japan is especially vulnerable to higher energy costs stemming from the war, given its dependence on oil and gas imports. This notion weighed heavily on the yen in recent weeks.
Source: investing