By Max Sato
(MaceNews) – Japan’s government continues to expect a gradual economic recovery, backed by strong demand for investment in artificial intelligence, while Tokyo stock markets keep flirting with record highs on hopes of an end to the Iran war that would allow reopening of the Strait of Hormuz, crucial for oil and gas exports from the Mideast Gulf states.
But cabinet ministers also repeated their warning about elevated costs for energy and tighter supply of refined petroleum products, particularly naphtha, the source for ethylene, propylene and benzene among others. These petrochemicals are essential for producing plastics and resins that are used in most consumer and industrial goods ranging from vehicles and appliances to paint and food packages.
In its monthly report for April released Thursday by the Cabinet Office, the government maintained its core 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.”
By category, ministers upgraded the official views on both business investment and public works spending. Core machinery orders, a key leading indicator of business investment in equipment and software, surged 13.6% on the month in February to hit a record high value of ¥1.12 trillion, easily surpassing the previous high of Y1.08 trillion reached in January 2008.
The government also repeated its slogan to build a “strong Japanese economy,” mainly by focusing fiscal spending on growth areas including artificial intelligence, semiconductors, shipbuilding, aerospace, ocean and defense among other industries, and by seeking stable inflation led by sustained wage hikes. Those goals reflect the idea of a “proactive” but “responsible” fiscal policy stance aimed at investing in developing resources and capacity that can enhance Japan’s economic security and independence.
As the Strait of Hormuz is effectively blocked by both Tehran and Washington in the latest development in the Iran war, Tokyo is seeking alternative supply sources of crude oil by increasing imports from the United States and Mexico. It is also releasing its strategic reserves. “The government will work to ensure a stable supply of crude oil…and the smooth distribution of critical materials.”
The government maintained its core assessment of other key economies. “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 is growing.”
After downgrading the U.S. economy for the first time since May 2025 in the March report, the government 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.”
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.” It added that softer consumer sentiment needs a close watch.
Real average household spending remained sluggish in February, down a deeper-than-expected 1.8% on year after having unexpectedly posted a second straight drop in January (-1.0%), largely in line with the three-month moving average (-1.9% vs. -0.4% previously). Consumers remain cautious amid falling real wages and there is also a widespread move to switch to more affordable mobile communications plans.
The impact of the Mideast conflict has been largely limited as the government continues to limit energy price hikes with subsidies to refineries and electric power suppliers. This in turn helped households lower their average spending on utilities by 5.5% in nominal terms compared to a year earlier. When adjusted for inflation (total CPI minus owners’ equivalent rent = 1.4% y/y), real spending on that key category was flat in February.
In the utilities category, electricity bills rose 2.6% (down a nominal 5.6%) in February but this was offset by other charges, most notably costs of heating oil used in kerosene heaters that plunged 16.8% (-19.7% in nominal terms).
The government continues to describe industrial production as being “flat.”
Japan’s industrial production for March, due on April 30, is forecast to post a modest 0.7% rebound on the month after slipping 2.0% in February and rising 4.3% in January, which was driven by a pickup in passenger cars and rush exports of computer chips, non-ferrous metals and plastics ahead of the holidays in China and some other Asian countries around the Feb. 17 Lunar New Year.
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would surge 3.8% on the month in March, led by solid demand for production machinery, communications infrastructure and computer chips, before rising a further 3.3% in April on the back of lingering demand for production machinery and communications infrastructure as well higher output of general machinery.
The government maintained its assessment of exports, saying they are “largely flat.”
Trade data released this week showed Japan’s export values posted their seventh straight rise on year in March, up 11.7% as largely expected, to hit a fresh record high of ¥11.00 trillion, surpassing their previous high of ¥10.41 trillion reached in December 2025. The pace of increase had slowed to a revised 4.0% in February, which was in payback for rush shipments to Asia before the Feb. 17 Lunar New Year that drove overall January exports to surge 16.8%.
The double-digit percentage gain was driven by computer chips, non-ferrous metals and mineral fuels as seen in recent months. Japanese carmakers and steel mills are weathering Trump tariffs storms. Japan’s total shipments to the United States were still bigger than those to China in both values and volumes in the fiscal year ended on March 31.
In fiscal 2025, shipments to the world also climbed to their highest level on record, rising 4.0% for the first annual increase in five years to ¥113.24 trillion, reflecting strong demand for semiconductors, non-ferrous metal and materials and overcoming tariff-caused declines in shipments of autos, iron/steel and auto parts.
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” vs. “showing signs of a pickup” (wording changed for the first time in seven months; upgraded in September 2025; downgraded in February 2024).
Business investment in equipment and software is “picking up” vs. “picking up moderately” (the first upgrade in seven months; last upgraded in September 2025; downgraded in November 2023).
Housing construction “has a weak undertone” (unchanged; upgraded in August 2024; downgraded in August 2025).
Public investment is “solid” vs. “firm” (the first upgrade in eight months: last upgraded in August 2025; 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 despite the effects of the U.S. trade policy” (unchanged; 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” vs. “largely flat” (wording changed for the first time in 12 months; 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 are “rising gradually” (unchanged; last changed in November 2025).
Consumer prices are “rising moderately” (unchanged; last changed in March 2026).