Japan: Economic growth picks up in the first quarter of 2026
Economic growth beats market expectations in Q1: According to a preliminary release, Japan’s GDP expanded 2.1% on a seasonally adjusted quarter-on-quarter annualized (SAAR) basis in Q1, following downwardly revised 0.8% growth in the prior quarter. Q1’s reading was the strongest since Q3 2024 and was far above market expectations.
In annual terms, GDP grew 0.6% in Q1, following 0.2% growth in the previous quarter.
External demand drives GDP growth: Relative to the prior quarter’s data, figures in Q1 improved for private consumption (+1.1% in SAAR terms vs +0.2% in Q4), exports of goods and services (+7.1% vs +0.7% in Q4) and imports of goods and services (+1.9% vs 0.0% in Q4). In contrast, readings softened for government consumption (+0.4% vs +1.5% in Q4) and fixed investment (+2.1% vs +6.6% in Q4).
External demand was the main engine of growth, underpinned by a healthy global economy lifting Japanese exports to the U.S. and China. Moreover, domestic demand remained resilient, supported by the economic stimulus package passed by Takaichi’s government in November 2025 and by government subsidies cushioning the early impact of the U.S.-Iran war on energy costs.
GDP growth to moderate in the following quarters: Although the year began on a solid footing, GDP growth is expected to decelerate to below 1% in Q2 and stay there through end-2026. As such, our panelists expect GDP growth to ease this year from 2025, as lingering spillovers from the U.S.-Iran war raise energy costs, weighing on household consumption and industrial output as well as dampening external demand. Still, further fiscal support should help sustain economic activity: Alongside energy subsidies in place since mid-March and the stimulus package passed in November 2025, the Takaichi administration plans to draft a supplementary budget to finance extended energy and utilities subsidies before the current Diet session closes in July, while additional supplementary budgets may follow, posing upside risks to GDP growth.
Panelist insight: On the impact of the U.S.-Iran war, EIU analysts commented:
“Although the Japanese economy withstood the initial impact of the Iran war well, the first-quarter data are an imperfect guide to Japan’s economic trajectory. Disruption caused by the closure of the Strait of Hormuz were not fully manifest during that period, and the initial shock to household finances was largely shielded by government subsidies. […] We forecast that real GDP growth will slow markedly in the second quarter of 2026 as the prolonged closure of the Strait of Hormuz has a more potent impact on inflation and industrial production that will be more difficult to mitigate by fiscal measures.”