(July 30): Japan lowered its economic growth forecast for the current fiscal year, reflecting expectations that higher oil prices driven by tensions in the Middle East will weigh on domestic demand and add urgency to Prime Minister Sanae Takaichi’s efforts to address rising costs of living.
The government cut its projection for real growth in fiscal 2026 to 0.9% from the January forecast of 1.3%, the Cabinet Office said Thursday. It said higher crude prices are expected to weigh on the economy, although the drag should be partly offset by stronger wage growth and policy support.
Japan will release gross domestic product (GDP) data for the April-June quarter on Aug 17.
The revised outlook highlighted prospects for softer domestic demand. Private consumption is now projected to grow 0.9% this fiscal year, down from a previous projection of 1.3%, while capital outlays are now seen growing 2.3%, versus 2.8% previously. The forecast for the overall inflation gauge was raised to 2.2% from 1.9%.
The weaker outlook adds to the challenges facing Takaichi as support for her administration softens. Voters have grown increasingly frustrated that wage gains have failed to keep pace with inflation, while the premier has faced criticism for focusing on preferred policy priorities and long-term goals rather than the rising cost of living.
The trajectory of the government’s assessment contrasts with the BOJ’s increasingly upbeat view of the economy. The central bank is expected to discuss raising its fiscal 2026 growth forecast from the current 0.5% at this week’s policy meeting, according to people familiar with the matter, as resilient exports and robust global demand tied to artificial intelligence continue to support the economy.
For fiscal 2027, the government projects 1.1% real GDP growth on expectations that domestic demand will strengthen as Takaichi’s crisis-management and growth investment strategy supports activity.
The report also reaffirmed the government’s long-term growth ambitions. It projects private-sector capital investment to reach around ¥240 trillion (US$1.5 trillion or RM6 trillion) by fiscal 2040 under the most optimistic scenario, approaching the ¥250 trillion target set out in its latest annual economic policy guidelines. Driven largely by stronger capital spending, nominal GDP is forecast to approach ¥1,100 trillion by fiscal 2040, it said.
The Cabinet Office also updated its medium-term fiscal projections. The primary balance, a key gauge of fiscal health that excludes interest payments on government debt, is now projected to show a ¥1.2 trillion deficit in fiscal 2026, wider than the ¥800 billion shortfall projected in June. The deterioration reflects the impact of extra budgets, which offset gains from stronger-than-expected tax revenue, it said.
Achieving a balance under this broader measure has long been the nation’s key fiscal goal, though Takaichi has earlier played it down, favoring instead a lowering of the ratio of public debt to gross domestic product and pleding to track primary balance on a multiple-year basis.
The government still expects the primary balance to return to a ¥1.4 trillion surplus in fiscal 2027, even assuming ¥10 trillion in additional fiscal spending, provided the growth outlook materialises.
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