Japan Economy Cools: Capital Expenditure Slumps

Japan's economy experienced a slowdown in the first quarter of 2026, with revised GDP data indicating an annualized growth of 1.8%. This figure is lower than the initially reported 2.1% and reflects challenges in capital expenditure.

Despite the overall slowdown, private consumption, a major component of the economy, increased by 0.3%, aligning with preliminary figures. However, businesses' capital expenditure contracted by 0.7% in the same period.

External demand contributed positively to GDP, adding 0.3 percentage points. The government recently approved a $19 billion supplementary budget to address rising energy costs impacting households.

These rising costs are largely attributed to the Middle East conflict, specifically strikes on Iran and the closure of the Strait of Hormuz, which have caused global oil prices to soar. Japan, heavily reliant on Middle Eastern oil, faces significant exposure to these disruptions.

Concerns are mounting over potential inflation, reduced household purchasing power, and squeezed corporate margins, increasing the risk of an economic downturn. The Bank of Japan is expected to consider an interest rate hike this month, contingent on market stability.