–Some Economists Project Q2 GDP Dip as Effects of Mideast Conflict on Consumption, Capex to Become More Pronounced
By Max Sato
(MaceNews) – Japan’s government is sticking to its gradual economic recovery scenario after the January-March GDP data confirmed a steady recovery from a mild slump two quarters earlier but officials continued to warn about the drag from surging import costs and shortages of naphtha and other key materials.
In its monthly report for May released Tuesday by the Cabinet Office, the government maintained its assessment, saying that the economy is “recovering at a moderate pace but the impact of the situation in the Middle East needs a close attention.”
Prime Minister Sanae Takaichi has been trying to ease the dampening effects of the blockade of the Strait of Hormuz, the crucial passage for oil and gas exports from the Persian Gulf, by facilitating increased crude oil purchases from other regions and reviving subsidies to cap the price hikes for gasoline and other fuels.
But the public approval ratings of the Takaichi administration have gradually slid from exceptionally high levels scored when she took office last October. There are growing concerns among voters amid reports of acute supply shortages of naphtha, crucial for producing plastics and resins that are used in many consumer and industrial goods ranging from vehicles and appliances to paint and food packages.
Data released last week showed the economy grew 0.5% on quarter, or an annualized 1.7%, in the January-March quarter, accelerating from a slight 0.2% rebound in the last three months of 2025 on the 0.6% contraction in July-September, the first drop in six quarters. The Q1 GDP growth was driven by rebounds in both net exports and public works as well as sluggish but resilient private consumption and a modest gain in business investment in equipment and software amid the artificial intelligence boom.
Looking ahead, however, some economists expect the economy to shrink slightly in the April-June quarter (data due Aug. 17) as the Iran war that broke out in late February has already triggered a spike in energy prices and caused shortages of petrochemical products and building materials. Factory production is constrained, construction is being delayed and retailers are being forced to raise prices.
In its near-term outlook, the government remains focused on the lingering geopolitical risks in the Gulf region, saying “The improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the situation in the Middle East needs a close watch.” It left out its warning about the effects of the protectionist U.S. trade policy as Japanese auto and metal makers have largely weathered stiff tariffs while being supported by solid demand from Europe.
The government maintained its core assessment of global growth. “The world economy continues to show gradual recovery while some regions are showing weakness,” it said, “However, the uncertainty over the global economy including the situation in the Middle East continues.” Last month, it said the uncertainty was “growing.”
After downgrading the U.S. economy for the first time since May 2025 in the March report, the government has maintained its assessment of the world’s largest economy, saying it is “expanding moderately, although showing weakness in some areas.” The official views are also unchanged on other major economies: The Eurozone is “showing signs of a pickup” and China is “slowing gradually.”
In other areas, the government upgraded its view on South Korea, saying its economy is “recovering gradually” (vs. “picking up” in the April report). It also described the UK economy as “picking up,” an upgrade from its previous statement that the pace of pickup was “more gradual.”
Key points from the monthly report:
The government maintained its core assessment of private consumption that accounts for about 55% of the GDP, saying that it is “showing signs of a pickup.” Last month, it added that softer consumer sentiment needs a close watch.
Real average household spending remained weak in March, marking a fourth straight year-on-year decline, down 2.9% (a nominal 1.3%) after a 1.8% dip in February, but the sharper-than-expected slump was exaggerated by a volatile category of vehicles and related goods, which pushed down overall spending by 2.82 percentage points. Excluding home maintenance and repairs and other volatile items like vehicles and gift money, the core measure fell by a smaller 1.3% (up 0.3% in nominal terms) after falling 2.3% in the prior month.
Overall, consumers have been cautious about spending beyond necessities amid depressed real wages, trimming expenditures on eating out and paying less gift money at ceremonies, while they have shelled out higher dental bills in recent months. There is also a widespread move to switch to more affordable mobile communications plans.
In the January-March quarter, real average expenditures by households with two or more people recorded a slight 0.7% rebound on quarter in the consumption trend index after tanking 3.2% in October-December and rising 1.3% previously. The CTI slipped 1.3% on the month in March vs. +0.9% in February and +0.3% in January.
The government continues to describe industrial production as being “flat.”
Japan’s industrial production for April, due on May 29, is forecast to post a 1.0% drop on the month in April for a third straight drop after slipping a revised 0.4% in March. The effective blockade of the Strait of Hormuz by Washington and Tehran is expected to have continued to dampen factory output by squeezing the availability of naphtha, the crucial raw material for producing plastics and resins that are used in most consumer and industrial goods ranging from vehicles and appliances to paint and food packages.
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would remain depressed, down 0.7% on the month in April after adjusted for the data’s upward bias, as the Iran war impact lingers and despite plans to raise output of computer chips and vehicles. The METI projected that production would rebound 2.2% in May.
The government maintained its assessment of exports, saying they are “largely flat.”
Trade data released last week showed Japan’s export values rose 14.8% on the year in April for an eighth consecutive monthly increase, reaching ¥10.5 trillion, the second-highest level on record, after hitting a record high in March. The double-digit gain was led by shipments of computer chips, non-ferrous metals and engines, as largely seen in recent months.
Exports to the key U.S. market marked the second straight year-on-year rise, led by semiconductor-producing equipment and construction machinery. Those to Europe remained above year earlier levels for ninth straight month, backed by continued solid demand for vehicles, engines and construction machinery. Shipments to China were up for a second month in a row, reflecting needs for memory chips and non-ferrous metals, as the world’s second largest economy is picking up gradually from the slump caused by its property market problems.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
Private consumption is “showing signs of a pickup but softer consumer sentiment needs a close watch” (unchanged; upgraded in September 2025; downgraded in February 2024).
Business investment in equipment and software is “picking up” (unchanged; upgraded in April 2026; downgraded in November 2023).
Housing construction “has a weak undertone” (unchanged; upgraded in August 2024; downgraded in August 2025).
Public investment is “solid” (unchanged: upgraded in April 2026; downgraded in December 2025).
Exports are “largely flat” (unchanged; upgraded in February 2025; downgraded in July 2025).
Imports are “largely flat” (unchanged; upgraded in May 2025; downgraded in November 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “showing signs of improvement but the Mideast situation needs a close watch” vs. “showing signs of improvement despite the effects of the U.S. trade policy” (wording changed for the first time in three months; upgraded in February 2026; downgraded in August 2025).
Business sentiment is “largely flat but firms are cautious about their outlook and thus the situation in the Middle East needs a close watch” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; downgraded in January 2023).
Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
Domestic corporate goods prices have been “rising recently” vs. “rising gradually” (wording changed for the first time in six months; last changed in November 2025).
Consumer prices are “rising moderately” (unchanged; last changed in March 2026).