Japan's economy grew at an annualized 2.1% in the first quarter of 2026, surpassing analysts' expectations, government data released Tuesday showed.
GDP rose by 2.1% compared with Reuters-polled analysts' average estimate of 1.7%, and against the 1.3% in the previous quarter.
On a quarter-on-quarter basis, the economy expanded 0.5%, compared with estimates of 0.4%, and improving from the 0.3% growth at the end of 2025.
These figures do not capture the full impact of the Iran war, which started at the end of February.
The Bank of Japan has cut its growth forecast for the fiscal year 2026 to 0.5% from 1%, and sharply raised its core inflation outlook to 2.8% from 1.9%.
At its last meeting on May 7, the bank warned that Japan's economic growth was likely to decelerate this year, as the increase in crude oil prices due to the the Middle East crisis is expected to crimp corporate profits and real household incomes.
Back then, Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC a "very light stagflation-like situation could happen this year" for Japan.
He said that real disposable incomes have been negative "for some time," and forecast that the country will see stagnant growth and inflation above 2%.
Inflation in Japan accelerating in March for the first time in five months.
"The rise in crude oil prices is expected to push up prices, mainly of energy and goods, with moves to pass on wage increases to selling prices continuing," the BOJ said.
On Monday, Reuters reported that Tokyo was likely to issue fresh debt for an extra budget so as to cushion the economic blow from the Middle East war as the country subsidizes energy bills.
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