PUBLISHED June 28, 2026
A Moderate Recovery, Interrupted
According to Daiichi Life Research Institute economist Yoshiki Shinke, real GDP growth in Q1 2026 came in at +1.8% on a quarter-on-quarter annualized basis, marking the second consecutive quarter of positive growth and remaining above Japan’s potential growth rate. The data suggests that, prior to the full impact of worsening conditions involving Iran, Japan’s economy had maintained a moderate recovery trend. Real GDP growth is forecast at +0.5% for fiscal year 2026 as a whole and +1.1% for fiscal year 2027, with growth expected to remain low in the first half of FY2026 due to downward pressure from the Middle East before gradually recovering from the second half onward.
Firms Rush to Stockpile as Bottlenecks Intensify
In the first half of FY2026, the primary concern is the adverse impact on production and investment activity through supply uncertainty and sourcing difficulties.
As firms rush to secure inventories to ensure business continuity, bottlenecks in distribution and a tightening sense of supply-demand conditions have intensified, and some products have already begun to see price increases, delivery delays, and order restrictions. Against this backdrop, real GDP growth in Q2 2026 is forecast to come in at just +0.3% on a quarter-on-quarter annualized basis — a dramatic deceleration from the previous quarter.
The Recovery Scenario Hasn’t Collapsed — Just Been Delayed
Although the economy is expected to stagnate in the near term, there is no need to conclude that the recovery scenario itself has collapsed. If the situation surrounding the blockade of the Strait of Hormuz moves toward resolution and the outlook for supply normalization becomes clearer, the view that inventories and alternative sourcing can cover near-term needs is likely to spread, allowing supply uncertainty and related disruptions to subside.
The institute’s main scenario assumes that concerns over navigation through the Strait of Hormuz will ease by the summer of 2026, with Dubai crude oil prices assumed to settle around $80 per barrel at end-2026 and around $70 per barrel at end-2027 — still well above pre-crisis levels.
Real Wages Set to Come Under Pressure From Autumn
Even if the adverse effects of supply constraints ease, the impact on prices and the associated drag on the economy are likely to persist for some time. Food prices are expected to rise, reflecting higher costs for packaging materials and other inputs, while increases in electricity and gas charges are also expected to become more pronounced from the autumn of 2026 onward. As a result, real wages are likely to be restrained from the autumn, and growth in private consumption is expected to remain moderate rather than collapse outright.
Corporate profits are currently at historically high levels, suggesting that firms have a solid degree of resilience to the shock, and their positive stance toward business investment — particularly in digitalization and labor-saving technology — is expected to remain intact even amid rising costs. Exports are expected to be underpinned by the resilience of the US economy: as a resource-exporting country, the United States is less adversely affected by the terms-of-trade impact of higher oil prices than resource-importing economies, which should support external demand even as downside risks to European and Asian economies remain a concern.
Corporate profits are currently at historically high levels, suggesting that firms have a solid degree of resilience to the shock, and their positive stance toward business investment — particularly in digitalization and labor-saving technology — is expected to remain intact even amid rising costs. Exports are expected to be underpinned by the resilience of the US economy: as a resource-exporting country, the United States is less adversely affected by the terms-of-trade impact of higher oil prices than resource-importing economies, which should support external demand even as downside risks to European and Asian economies remain a concern.
The possibility that a reduction in the consumption tax rate on food products will be implemented in FY2027 or later has been increasing, though the measure has not been incorporated into the current outlook given that policy design details — timing, tax rate, whether cash benefits or subsidies will be provided, and financing — remain unclear. As a mechanical estimate, if the food consumption tax rate were lowered to 1% for two years from April 2027, combined with cash benefits of ¥600 billion per year, real GDP growth in FY2027 would likely be boosted by slightly more than 0.2 percentage points.
The core consumer price index, excluding fresh food, is forecast to rise by +2.4% in FY2026 and +2.1% in FY2027. The FY2026 forecast was revised down slightly, mainly because electricity and gas subsidies implemented in the summer of 2026 were larger than expected. Nevertheless, upward pressure on prices is expected to build going forward, reflecting elevated resource prices, the pass-through from higher naphtha prices to packaging materials and processed food, and lagged increases in electricity and gas charges — with consumer price inflation likely to peak in the first quarter of 2027 before moderating thereafter.
The main scenario assumes that negotiations between Iran and the United States will reach an agreement, improving conditions surrounding the de facto blockade of the Strait of Hormuz. However, the outlook for negotiations remains uncertain, and prolonged tensions cannot be ruled out. If firms accelerate inventory accumulation in response to extended uncertainty, disruptions could intensify further, production activity and construction work could remain depressed for an extended period, and exports could face larger downside risks — a scenario in which FY2026 growth could turn negative, raising the risk of outright recession.
The possibility that a reduction in the consumption tax rate on food products will be implemented in FY2027 or later has been increasing, though the measure has not been incorporated into the current outlook given that policy design details — timing, tax rate, whether cash benefits or subsidies will be provided, and financing — remain unclear. As a mechanical estimate, if the food consumption tax rate were lowered to 1% for two years from April 2027, combined with cash benefits of ¥600 billion per year, real GDP growth in FY2027 would likely be boosted by slightly more than 0.2 percentage points.
The core consumer price index, excluding fresh food, is forecast to rise by +2.4% in FY2026 and +2.1% in FY2027. The FY2026 forecast was revised down slightly, mainly because electricity and gas subsidies implemented in the summer of 2026 were larger than expected. Nevertheless, upward pressure on prices is expected to build going forward, reflecting elevated resource prices, the pass-through from higher naphtha prices to packaging materials and processed food, and lagged increases in electricity and gas charges — with consumer price inflation likely to peak in the first quarter of 2027 before moderating thereafter.
The main scenario assumes that negotiations between Iran and the United States will reach an agreement, improving conditions surrounding the de facto blockade of the Strait of Hormuz. However, the outlook for negotiations remains uncertain, and prolonged tensions cannot be ruled out. If firms accelerate inventory accumulation in response to extended uncertainty, disruptions could intensify further, production activity and construction work could remain depressed for an extended period, and exports could face larger downside risks — a scenario in which FY2026 growth could turn negative, raising the risk of outright recession.
