Japan Economy Slows
Japan's Economy Slows in Q1 Amid Weak Capex and Mideast Conflict, Revised Data Shows
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Japan's economy grew at an annualized rate of 1.8% in the first quarter of 2026, according to revised data released on June 8 — down from the initial estimate of 2.1%, Reuters reported. Weak business investment and rising energy costs from the Middle East conflict dragged the figure lower.
Without annualization, GDP grew 0.5% for the quarter — slightly better than the 0.3% median forecast. But the headline number masked a sharp drop in capital expenditure, or capex, which fell 0.7% quarter-on-quarter after an initial projection of +0.3%, according to Investing.com.
Businesses Hold Cash as Capex Falls Short
The biggest drag on the revised GDP figure was weak business spending. Capital expenditure fell 0.7% in Q1, flipping from an earlier forecast of modest growth, according to MarketScreener. Companies cut back on new equipment and expansion plans as global uncertainty rose.
The pullback is striking because corporate profits are actually strong. Recurring profits jumped 14.6% while corporate sales rose 1.1%, according to research compiled by Yahoo Finance. Companies are profitable — they are just too unsettled to spend. Analysts call this a cash-hoarding paradox driven by the Iran conflict.
Middle East Conflict Hits Japan's Energy-Dependent Economy
In late February 2026, U.S.-Israeli strikes on Iran led to the effective closure of the Strait of Hormuz. That chokepoint handles about 20% of global oil and gas. Japan imports heavily from the Middle East, leaving it acutely exposed to the supply shock, according to The News Tribune.
Higher fuel costs are stoking inflation across Japan. The GDP price index climbed to 3.4%, and underlying inflation is now approaching the Bank of Japan's 2% target. Prime Minister Sanae Takaichi's government approved a $19 billion supplementary budget to help households cope with rising energy bills, according to Star-Telegram.
Consumer Spending Holds Up Despite the Slowdown
Not all the data was grim. Private consumption rose 1.3% in the revised figures — a solid gain that beat initial moderate expectations, according to Bellingham Herald. Wage growth from Japan's annual Shunto negotiations helped households keep spending even as energy costs rose.
Economy Minister Kiuchi pointed to the strength of wage talks and pledged "nimble government action" to address risks from the conflict, according to BND. Yoshiki Shinke of Dai-ichi Life Research Institute noted that Japan had economic buffers in place before the Iran war and could weather the shock if supply disruptions stay temporary.
Bank of Japan Still Expected to Raise Rates in June
Despite the GDP downgrade, markets have priced in an 80–96% chance of a rate hike at the BOJ's June 15–16 meeting, which would push the benchmark rate from 0.75% to 1.0%. BOJ Governor Kazuo Ueda said on June 3 there was a "good chance" of a hike this month, according to Tri-City Herald.
The BOJ is balancing two risks. Energy-driven inflation is pushing prices higher, which argues for tighter policy. But a slowing economy argues for caution. Ueda said the pass-through of high oil prices is "faster than before," signaling he sees inflation as the bigger threat — unless the Middle East conflict escalates further, according to Miami Herald.
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