Japan’s economy lost momentum in the January-March quarter from the previous three months on sluggish capital expenditure, revised gross domestic product data showed on Monday, pointing to challenges ahead due to the Middle East conflict.
The economy rose at an annualised rate of +1.8%qoq in 1QCY26 (4Q25: +0.8%qoq), lower than the preliminary estimate of +2.1%qoq but still exceeding market expectations of +1.3%qoq. The reading marks the strongest expansion since 3QCY24. Private consumption strengthened alongside a rebound in public investment, which rose for the first time in three quarters, though government expenditure rose at a slower pace.
On a quarterly basis, growth expanded by +0.5%qoq (4QCY25: +0.2%qoq), in line with preliminary estimates. Private consumption rose by +0.3%qoq (4QCY25: +0.1%qoq), matching earlier estimates underpinned by easing inflationary pressures and steady wage growth. Public investment also turned positive for the first time in three quarters, growing by +1.5%qoq (4QCY25: -0.2%qoq), a slight upward revision from +1.4%qoq in the flash figure on the back of higher infrastructure spending.
Net trade also provided a positive lift as exports rose to +1.8%qoq (revised up from +1.7%qoq in the flash data; 4QCY25: +0.2%qoq) on robust overseas demand for autos, comfortably outpacing a modest +0.4%qoq rise in imports. Meanwhile, government spending growth was little changed at +0.3%qoq. The primary drag came from business investment, which was sharply revised downward to -0.7%qoq (from a preliminary +0.3%qoq; 4QCY25: +1.2%qoq), weighed down by higher interest rates and softening corporate sentiment.
MBSB, in its research note, highlights that Japan’s heavy reliance on Middle Eastern oil leaves it acutely vulnerable. If regional tensions persist, supply disruptions risk stoking inflation, eroding household purchasing power, and squeezing corporate margins. To cushion households against these rising energy costs, the government announced a $19b supplementary budget for this fiscal year. Meanwhile, the Bank of Japan is still expected to proceed with raising interest rates this month, unless a sharp escalation in the conflict severely roils global markets.
