Japan’s economy expanded faster than expected in the first quarter of 2026, offering an encouraging start to the year even as policymakers and analysts warned that rising energy costs could soon put renewed pressure on households and businesses.
Official data released on Tuesday showed gross domestic product grew at an annualised rate of 2.1% between January and March, beating the 1.7% forecast by analysts polled by Reuters. The figure also marked a stronger performance than the 1.3% expansion recorded in the final quarter of 2025.
On a quarterly basis, the economy grew by 0.5%, slightly above expectations for a 0.4% increase and ahead of the 0.3% growth reported in the previous three months. Compared with the same period a year earlier, GDP rose by 0.6%.
The first-quarter improvement was supported by firmer private consumption and steady overseas demand, with exports helped by continued strength in technology-related products. The figures suggest Japan entered the year with better momentum than many economists had anticipated, after months of concern over weak domestic demand and persistent inflation.
However, the latest data does not fully capture the economic fallout from the Iran war, which began near the end of February. The conflict has added upward pressure on crude oil prices, raising concerns for Japan, which depends heavily on imported energy.
“Though Japan’s GDP grew healthily by 0.5% in Q1, we think the Q1 GDP is already in the rear-view mirror and expect the economy to feel the strains from high energy costs ahead,” Norihiro Yamaguchi, lead Japan economist at Oxford Economics, told CNBC.
Yamaguchi said exports linked to strong IT demand could offer some support in the near term, but added that higher energy prices and increased uncertainty were likely to weigh on consumption and investment.
The Bank of Japan has already lowered its growth forecast for fiscal 2026 to 0.5% from 1%, while raising its core inflation outlook to 2.8% from 1.9%. At its 7 May meeting, the central bank warned that higher crude oil prices linked to the Middle East crisis could squeeze company profits and reduce real household incomes.
“The rise in crude oil prices is expected to push up prices, mainly of energy and goods, with moves to pass on wage increases to selling prices continuing,” the BOJ said.
Reuters reported on Monday that Tokyo was likely to issue fresh debt to fund an extra budget aimed at cushioning the impact of the conflict, including subsidies to help ease energy bills.