Mid-year review: Resilient growth, volatile inflation, uncertain policy path

Research evidence excerpt

Mid-year review: Resilient growth, volatile inflation, uncertain policy path

Another year, another shock

In the Year‑Ahead published at end‑2025, we forecast real GDP growth of 0.7% in CY26

and 0.8% in CY27. The US–Iran conflict and the resulting spike in commodity prices,

particularly energy, prompted us to revise down our projections amid heightened tail

risks to the Japanese economy. As a net energy importer, Japan faced a clear negative

terms‑of‑trade shock.

The US–Iran deal and MOU signed on 18 June reduce the risk of tail outcomes in energy

markets and the global economy (see Global Energy Weekly: Oil gets the memo, 17 June

2026). Meanwhile, Japan’s economy has continued to hold up. Middle East tensions have

weighed on auto exports and constrained production of petrochemical intermediates

through supply disruptions (see Chartbook (May ’26): Sectoral impacts of Hormuz

disruption begin to surface, 15 June 2026). However, consumption has continued to

expand gradually. Machinery orders have remained strong, reflecting the AI‑driven upturn

in the global capex cycle (Exhibit 2).

The resilience reflects strong buffers at the start of the year: solid wage growth,

government support measures, and resilient corporate earnings. These factors continue

to support a gradual pick‑up in growth. Our GDP forecasts remain broadly unchanged at

0.6% and 0.7% for CY26 and CY27, respectively. We introduce our CY28 real GDP

forecast at 0.7% (Exhibit 1).

Capex to drive growth, fiscal support to cushion consumption

Capex is likely to remain the main driver of growth, underpinned by structural tailwinds.

These include chronic labor shortages, which are forcing firms to spend on automation

and labor-saving equipment, economic security and reshoring, as well as investment in