Japan’s economy expanded faster than expected in the first quarter, supported by resilient exports and steady domestic demand, although economists warned that the escalating energy crisis linked to the Iran conflict could sharply weaken growth in the months ahead.
According to government data released on Tuesday, Japan’s real gross domestic product (GDP) grew at an annualised pace of 2.1% during the January-March quarter, exceeding market expectations of 1.7% growth and improving from a revised 0.8% expansion in the previous quarter. According to Reuters, the stronger-than-expected performance marked the second consecutive quarter of economic expansion for the world’s fourth-largest economy.
Exports remained a key driver of growth, with net external demand contributing 0.3 percentage point to GDP. Private consumption and capital expenditure also rose 0.3% from the previous quarter, reflecting the support provided by robust corporate earnings and gradual wage growth.
The data is expected to play an important role in the Bank of Japan’s upcoming policy deliberations, as policymakers assess whether the economy is resilient enough to withstand the worsening energy shock and support another interest-rate hike as early as next month.
Economists noted that the first-quarter figures largely captured economic conditions before the full impact of the Middle East conflict began to affect global markets. Analysts increasingly expect Japan’s economy to lose momentum as higher fuel prices and prolonged uncertainty weigh on households and businesses.
The conflict in the Middle East has disrupted global energy supplies after U.S.-Israeli strikes on Iran and Tehran’s effective closure of the Strait of Hormuz, a critical route for global oil and gas shipments. The resulting surge in energy prices has heightened concerns for Japan, which relies heavily on Middle Eastern oil imports.
Rising fuel costs are already intensifying inflationary pressures in Japan by raising import prices and squeezing household purchasing power. Businesses are also facing tighter profit margins as operating costs increase.
Analysts said the first-quarter GDP data may already be outdated given the rapidly deteriorating global energy environment. Economists expect elevated energy prices and uncertainty to curb consumption and business investment in the near term.
Financial markets showed limited reaction to the GDP release, with investor attention instead focused on geopolitical developments and U.S. President Donald Trump’s decision to halt a planned strike on Iran. The yen weakened to around 159 per dollar amid safe-haven demand for the U.S. currency, keeping traders alert for possible intervention by Japanese authorities.
Tokyo is suspected to have spent roughly 10 trillion yen in recent currency intervention efforts aimed at stabilising the yen, whose prolonged weakness has further increased import-driven inflation.
The worsening economic outlook has also complicated expectations for monetary policy. While the Bank of Japan had recently signalled a more hawkish stance, markets are now reassessing the likelihood of a near-term rate hike as risks to growth intensify.
At the same time, the Japanese government is preparing additional fiscal measures to cushion the economy from rising fuel costs, although further spending could add pressure to the country’s already strained public finances.
Economists warned that while limited fiscal support and strategic investment may help stabilise growth, Japan is entering an increasingly difficult period marked by rising inflation, slowing real wage growth and elevated geopolitical risks.
