TOKYO - Revised data released by the Cabinet Office showed Japan's real gross domestic product expanded at an annualized 1.4 percent from the previous quarter in the April-June period of 2026. The economy grew for a third straight quarter and can be said to have held up overall despite the adverse impact of heightened tensions in the Middle East.
Still, key components of domestic demand, including private consumption and capital spending, remained weak, leaving the expansion short of momentum.
Private consumption was supported by wage hikes and government subsidies for fuel costs but remained nearly flat. Demand for air conditioners increased ahead of anticipated price rises accompanying tighter energy-efficiency standards in April 2027. Purchases of automobiles also boosted durable goods after a local tax levied at the time of acquisition was abolished at the end of March 2026, while spending on nondurable goods and services declined.
Capital spending fell for a second straight quarter. Persistent shortages of labor and materials continued to hamper the execution of investment projects. Government consumption increased, while residential investment declined.
External demand, or exports minus imports, underpinned growth in the April-June quarter. Crude oil imports from the Middle East plunged following the effective closure of the Strait of Hormuz, a key energy shipping route. Statistically, a drop in imports pushes up GDP. To make up for reduced crude oil shipments, the government drew down its reserves, with the resulting fall in inventories weighing on GDP.
The episode highlighted the vulnerability of Japan's economy stemming from its dependence on overseas energy supplies, but major disruptions were avoided this time through policy responses, including the release of reserves, and the securing of alternative sources.
Looking ahead, the past rise in crude oil prices and the weaker yen are expected to feed through to inflation and weigh on real incomes. In the July-September quarter, imports are expected to have recovered as Japan secured alternative crude oil supplies, with external demand weighing on the growth rate. The economy is likely to regain momentum through fiscal 2027 as the impact of elevated oil prices eases.
In devising an "exit" from measures to alleviate the burden of higher prices, such as gasoline subsidies and assistance with electricity and gas bills, the government needs to proceed with close attention to the impact on households.
Going forward, it will be essential to narrow the scope of such measures and adjust them gradually. Prolonging broad-based price relief will delay energy conservation and the shift to alternative energy sources, while also increasing the fiscal burden.
At the same time, the policy focus should shift toward strengthening the economy's supply capacity. The push by Prime Minister Sanae Takaichi's administration for public- and private-sector investment in crisis management and growth is a reasonable course.
Labor shortages should be eased by facilitating the movement of workers into growth sectors and encouraging foreign workers to stay, while sources of materials and energy need to be diversified and reliance on fossil fuels such as crude oil reduced. It is also important to promote capital spending in tandem with the use of artificial intelligence and investment in human resources, raising productivity through labor-saving measures and higher value-added output.
Funding for the 62 key products and technologies across the 17 strategic fields designated by the Takaichi administration for priority investment should be allocated selectively, based on their contribution to economic security, ability to spur private-sector investment and potential to raise productivity. Their effectiveness should be assessed after funds are deployed, with priorities adjusted accordingly.
Disciplined fiscal management by the government is also essential. Anticipated increases in tax revenue should not be casually treated as funding for additional spending, and solid funding sources must be identified for measures such as the consumption tax cut on food and beverages and higher defense spending.
If confidence in fiscal discipline and the Bank of Japan's independence from the government is undermined, the yen could weaken further and elevated prices could persist. Only by bolstering both the economy's supply capacity and fiscal sustainability while supporting households can the Takaichi administration live up to its pledge of "responsible proactive fiscal policy."
Hajime Inoue was born in 1983. He graduated from the Faculty of Economics at Hitotsubashi University. After joining Sumitomo Mitsui Banking Corp., he moved to the Japan Research Institute and became a senior chief researcher there in July 2026, his current position. His specialties are macroeconomics and economic and fiscal policy.
