The Japanese government has revised down its real GDP growth forecast for fiscal 2026 to 0.9%, compared with its earlier estimate of 1.3% released in January. According to the Cabinet Office, higher crude oil prices driven by geopolitical tensions in the Middle East are expected to weigh on domestic demand, reducing household spending and business activity.

The government now expects private consumption to grow by 0.9% during the fiscal year, down from its previous projection of 1.3%. Capital investment growth has also been revised lower to 2.3% from 2.8%, reflecting a more cautious outlook for business spending. At the same time, the inflation forecast has been raised to 2.2% from 1.9%, indicating that elevated energy costs are expected to keep price pressures high.

The weaker economic outlook adds pressure on Prime Minister Sanae Takaichi, whose administration continues to face public criticism over the rising cost of living. Although wage growth has improved, many households remain concerned that income gains have not kept pace with inflation, limiting consumer purchasing power.

The government's assessment differs from the Bank of Japan's relatively optimistic view of the economy. The central bank is expected to consider raising its fiscal 2026 growth forecast as resilient exports and sustained global demand for artificial intelligence-related products continue to support economic activity.

Looking ahead, the government projects real GDP growth of 1.1% in fiscal 2027, supported by stronger domestic demand and continued investment under its economic growth strategy. It also reaffirmed its long-term objective of increasing private-sector capital investment to around ¥240 trillion by fiscal 2040, with nominal GDP expected to approach ¥1,100 trillion under its optimistic scenario.

The Cabinet Office also revised its fiscal outlook, projecting a primary budget deficit of ¥1.2 trillion for fiscal 2026, wider than the ¥800 billion deficit estimated earlier. The deterioration reflects the impact of additional fiscal spending despite stronger-than-expected tax revenues. However, the government continues to expect the primary balance to return to a surplus of approximately ¥1.4 trillion in fiscal 2027, assuming the projected economic recovery materializes.