Japan Lowers FY2026 Economic Growth Forecast to 0.9 percent Amid Rising Oil Prices

The Japanese government has revised down its economic growth projection for the ongoing fiscal year, reducing the forecast from 1.3% to 0.9%, as rising crude oil prices are expected to weigh on the country’s import-dependent economy, Kyodo News reported. The updated estimate was included in the government’s midyear economic outlook released on Thursday. Officials highlighted that a weaker yen against the US dollar and increased energy costs linked to tensions in the Middle East remain key risks to Japan’s economic recovery.

The government noted that rising wages and consumer spending have received support from measures such as energy subsidies aimed at reducing the impact of higher utility costs on households. According to the latest forecast by Japan’s Cabinet Office, the yen is expected to average around 161.4 per US dollar, compared with the previous assumption of 155.2 made in January. The government has also significantly increased its crude oil price estimate to $92.5 per barrel from the earlier projection of $68 per barrel.

Japan’s heavy reliance on imported energy makes the economy particularly sensitive to fluctuations in global oil markets. A weaker currency further increases the cost of imported goods, adding pressure on businesses and consumers. For fiscal year 2027, which begins next April, the government expects economic growth to improve to 1.1%. The projection is based on Prime Minister Sanae Takaichi’s proposed initiatives to increase investment in areas such as crisis management and strategic industries.

Officials believe these measures could help boost household spending and encourage greater private-sector investment. However, the latest economic outlook does not include the possible effects of a proposed two-year reduction in consumption tax on food and beverages from April 2027, including its potential impact on inflation and business activity.

The government also adjusted its fiscal outlook, forecasting a primary budget deficit of 1.2 trillion yen ($7.3 billion) for fiscal 2026. This is wider than the 800 billion yen ($4.9 billion) deficit estimated in June, mainly due to additional spending requirements under a supplementary budget. Japan expects its primary budget balance to move into a surplus of 1.4 trillion yen ($8.5 billion) in fiscal 2027, assuming stronger economic growth and improved revenue conditions. The projection comes despite increased government spending aimed at strengthening investment and supporting long-term economic expansion.