Volkswacht Bodensee - Japan economy grows faster than expected in first quarter

Gross domestic product (GDP) in the world's fourth-biggest economy expanded 0.5 percent in the first quarter, exceeding market forecasts of 0.4 percent.

Growth in private consumption and corporate investment contributed to the expansion, according to the cabinet office data.

It follows growth of 0.2 percent -- revised downwards from an earlier reading of 0.3 percent -- in the last quarter of 2025.

The data came as Takaichi plans to draft a supplementary budget in a bid to safeguard growth, as consumers face soaring prices of everything from energy to rice due to the Middle East conflict.

"Given the continuing uncertainty surrounding the situation in the Middle East, it is important to closely monitor the trend of prices and the impact on the economy," the government's top spokesman Minoru Kihara told reporters Tuesday, adding that Takaichi had instructed the minister of finance to consider arrangements to minimise risk.

- 'Grind to a halt' -

Marcel Thieliant of Capital Economics warned the Middle East conflict was likely to impact data going forward.

"Japan's economy approached the Iran war with solid momentum but we think that GDP growth will grind to a halt this quarter and next," he wrote in a note.

Japan has been trying to stem rising oil prices with government subsidies, but the nation is likely to feel the full impact of soaring energy prices in months ahead, Thieliant said.

The country depends on the Middle East for around 95 percent of its oil imports.

Already consumer confidence has begun to slump, Thieliant added.

The Bank of Japan (BoJ) said it expected consumer prices to rise 2.8 percent in the current fiscal year, compared with the 1.9 percent previously forecast, due to the impact of the conflict. It lifted next year's outlook to 2.3 percent from 2.0 percent.

This could prompt it to raise interest rates as early as June.

It also slashed its fiscal 2026 growth forecast to 0.5 percent from 1.0 percent, and for next year trimmed its projection to 0.7 percent from 0.8 percent.

Taro Saito of the NLI Research Institute said that "disruptions in logistics will trigger production adjustments, while the deterioration of terms of trade due to soaring crude oil prices will put downward pressure on corporate profits and the real purchasing power of households".

Expectations of monetary tightening, along with concerns over Takaichi's fiscal policy, have helped drive a sharp rise in Japanese government bond yields in recent days.

Japan is also believed to have spent tens of billions of dollars in the market to boost the value of the yen, which has weakened in recent months due to the global uncertainty, as well as the gap between US and Japanese interest rates.

A weaker yen makes the cost of imports more expensive in Japan, which relies on foreign countries for much of its energy and food needs.

P.Staeheli--VB