Japan Cuts Fiscal 2026 Growth Forecast to 0.9% From 1.3% on Middle East Oil Price Pressure

Japan's government lowered its economic growth forecast for this fiscal year, saying higher global oil prices driven by rising tensions in the Middle East will weigh on domestic demand.

Bloomberg reported on July 29 that Japan's Cabinet Office cut its forecast for real gross domestic product growth in fiscal 2026 to 0.9% from the 1.3% projected in January. It said rising crude prices would restrain growth, although wage gains and government policy support would offset part of the hit.

The government also lowered its domestic demand outlook across the board. It cut its forecast for private consumption growth to 0.9% from 1.3% and reduced its capital investment growth projection to 2.3% from 2.8%. It raised its inflation forecast to 2.2% from 1.9%.

The downgrade is set to add pressure on Prime Minister Sanae Takaichi as she confronts rising prices. Voter frustration over living costs has mounted as wage gains fail to keep pace with inflation.

The Bank of Japan is taking a more upbeat view than the government. The BOJ is set to discuss raising its fiscal 2026 growth forecast from the current 0.5% at this monetary policy meeting, Bloomberg reported, citing solid exports and global demand linked to artificial intelligence.

The government projects real GDP growth of 1.1% in fiscal 2027 as domestic demand recovers. It said the Takaichi administration's crisis-management and growth-investment strategy would support economic activity.

The fiscal outlook worsened. The government projects the primary balance, a measure of fiscal health excluding interest costs, will show a deficit of 1.2 trillion yen in fiscal 2026, wider than the 800 billion-yen shortfall forecast in June.

Still, in fiscal 2027, it sees the primary balance returning to a surplus of 1.4 trillion yen even if it assumes an additional 10 trillion yen in fiscal spending, provided its growth outlook is realized.

Japan's GDP data for April through June is due on Aug. 17.