Japan’s government has reduced its real GDP growth forecast for fiscal 2026, which ends in March 2027, to 0.9% from the 1.3% projected in January. The Cabinet Office cited higher oil prices linked to tensions in the Middle East as a primary factor squeezing household spending and corporate profits.
The 0.4 percentage point reduction in the growth forecast is attributed to downward revisions in expectations for both private consumption and capital expenditure. Private consumption is now expected to rise by 0.9% in fiscal 2026, compared to the previous projection of 1.3%. Capital expenditure is forecast to grow by 2.3%, versus the earlier estimate of 2.8%.
Inflation pressures remain elevated, with consumer inflation projected at 2.2% for fiscal 2026, above the January estimate of 1.9%. The government had previously expected energy subsidies and slowing food prices to lower inflation, but rising oil prices have altered that outlook. A weak yen against the dollar further increases the cost of imports in local currency, contributing to higher inflation.
Budget Surplus Delayed
Despite the slower growth, the government forecasts nominal wages to rise by 3.1% annually through fiscal 2027 and expects real wage growth to remain positive despite persistent inflation. The primary budget balance is projected to return to a surplus of 1.4 trillion yen ($8.6 billion) in fiscal 2027.
This target has been elusive for decades. Except for the asset bubble period between 1986 and 1991, Japan’s primary budget balance has been in deficit for most of the postwar era. The goal of returning to a primary budget surplus was first introduced in the early 2000s and has been pushed back multiple times.
Japan’s public debt remains more than twice the size of its economy, the largest among developed economies. The Cabinet Office noted that the weaker growth outlook highlights the strain of rising energy costs on an economy heavily dependent on imported fuel.