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Japan’s economy expanded at a slower pace than initially estimated in the first quarter of 2026, highlighting growing concerns over business investment, rising energy costs, and the ongoing impact of the Middle East conflict.
According to revised government data released on Monday, Japan’s gross domestic product (GDP) increased by an annualized 1.8% during the January-to-March period. The updated figure was lower than the preliminary estimate of 2.1%, although it remained above Bloomberg analysts’ forecast of 1.4%.
A major factor behind the downgrade was weaker capital expenditure. Business investment declined 0.7% quarter-over-quarter as companies became more cautious amid economic uncertainty. Concerns surrounding the prolonged Middle East war and its effects on global energy markets prompted many firms to delay or reduce large-scale spending plans.
The revision was largely anticipated after recent survey data indicated that corporate spending activity remained subdued throughout the first quarter. Growth momentum also cooled following several quarters of strong investment in artificial intelligence infrastructure, which had previously supported economic expansion.
The ongoing conflict in the Middle East continues to cloud Japan’s economic outlook. Higher oil and natural gas prices have increased inflationary pressures and raised concerns about future consumer and business costs. As a resource-importing nation heavily dependent on foreign energy supplies, Japan remains particularly vulnerable to fluctuations in global energy markets.
Despite these challenges, the economy received support from resilient private consumption and steady export demand during the quarter. However, economists warn that prolonged geopolitical tensions could weigh on growth prospects in the coming months.
The weaker GDP figures may also influence the Bank of Japan’s policy decisions. The central bank is scheduled to meet next week and is expected to discuss the possibility of further interest rate increases to address inflation driven by elevated energy prices.
Meanwhile, the Japanese yen has faced renewed pressure against the U.S. dollar, with higher energy import costs contributing to currency weakness. Market participants will closely monitor upcoming economic data and the Bank of Japan’s policy stance for further direction on the USD/JPY exchange rate and Japan’s economic trajectory.
