Japan Cuts FY27 Growth Forecast to 0.9% As Oil Costs Hit Economy

Japan’s government has downgraded its economic growth outlook for the current fiscal year, citing the impact of higher energy prices and geopolitical tensions in the Middle East on consumer spending and business profitability.

In its latest mid-year economic projections, the Cabinet Office estimated that inflation-adjusted gross domestic product (GDP) will expand 0.9% in the fiscal year ending March 2027. The forecast is lower than the 1.3% growth projection made in January.

The government expects economic growth to improve in the following fiscal year, with GDP expansion projected at 1.1%, supported by stronger capital investment and private consumption.

The weaker near-term outlook reflects concerns over Japan’s dependence on imported energy. Rising oil prices have increased costs for households and companies, putting pressure on overall economic activity.

Private consumption growth is now expected to slow to 0.9% in fiscal 2026, compared with the earlier estimate of 1.3%. Capital expenditure growth has also been revised downward to 2.3% from the previous forecast of 2.8%.

At the same time, inflation expectations have increased. Consumer prices are projected to rise 2.2% during fiscal 2026, higher than the earlier estimate of 1.9%, mainly due to increased energy costs.

Despite inflationary pressures, the government expects wages to continue rising. Nominal wages are forecast to increase by 3.1% annually through fiscal 2027, allowing real wage growth to remain positive.

Japan’s fiscal outlook also showed some improvement, with the Cabinet Office projecting that the country’s primary budget balance could return to a surplus of 1.4 trillion yen ($8.6 billion) in fiscal 2027.

However, Japan continues to face long-standing fiscal challenges. Except for the asset bubble period between 1986 and 1991, the country has recorded primary budget deficits for most of the post-war era. As a result, public debt has grown to more than twice the size of the economy, making it the highest among developed nations.

The government’s goal of achieving a primary budget surplus, first introduced in the early 2000s, has been delayed several times due to economic challenges and fiscal pressures.