Japan Lowers Economic Growth Outlook as Energy Costs Bite

Japan’s Cabinet Office on Thursday trimmed its fiscal 2026 real GDP growth forecast to 0.9% from 1.3%, citing higher oil prices tied to Middle East tensions that are weighing on household spending and corporate earnings. The mid-year outlook sees a rebound in fiscal 2027, with growth accelerating to 1.1% on stronger consumption and investment. Private consumption growth for fiscal 2026 was cut to 0.9% from 1.3%, while capital expenditure is now expected to rise 2.3%, below the earlier 2.8% projection. Inflation is projected at 2.2%, up from 1.9%, reflecting elevated energy costs. Despite persistent price pressures, nominal wages are forecast to climb 3.1% annually through fiscal 2027, keeping real wage growth positive. The Cabinet Office also expects the primary budget balance to swing back to a JPY 1.4 trillion surplus in fiscal 2027, though the government has placed less emphasis on the balance as its main fiscal discipline measure.

Japan's parliament on Friday approved a JPY 21.3 trillion economic stimulus package on Friday to support the economy amid persistent inflation and the impact of U.S. tariffs. The plan allocates JPY 11.7 trillion, including tax breaks, to ease the burden of rising prices, while JPY 7.2 trillion will fund investments in strategic sectors such as semiconductors, artificial intelligence, and shipbuilding. To finance the measures, the government will compile a supplementary budget of JPY 17.7 trillion from its general account, surpassing the roughly JPY 13.9 trillion extra budget for fiscal 2024 and marking a new post-pandemic high. Lawmakers aim to finalize the supplementary budget later this month.

The Japanese government is expected to finalise an economic stimulus package on November 21, marking Prime Minister Sanae Takaichi’s first major policy initiative since taking office last month. According to a draft outline seen by Reuters, the package will urge the Bank of Japan to focus on achieving strong economic growth accompanied by stable prices, underscoring Takaichi’s preference for keeping interest rates low to support a fragile recovery. “It is extremely important for monetary policy to be guided in a way that achieves strong economic growth and price stability,” the draft said. The plan will include measures to ease the burden of rising living costs, boost crisis management and growth investment, and strengthen Japan’s defence capabilities. The government also pledged to coordinate closely with the BoJ to prevent a return to deflation and sustain growth. The Nikkei reported the package will feature tax cuts targeting investment in 17 key industries.