Japan’s Economy: Monthly Outlook (May 2026)

◆In light of the announcement of the Jan-Mar 2026 GDP 1st preliminary results, we have revised our economic outlook. We now see growth in Japan’s real GDP according to our main scenario at +0.6% in FY2026, and +0.8% in FY2027. (On a calendar year basis, we expect +0.6% in 2026 and +0.7% in 2027). In response to the situation in the Middle East, we have revised our growth forecast downward, particularly for FY2026, compared to our previous announcement on March 10.

◆According to our main scenario we assume that the situation in the Middle East will come to an end in a short period of time, and that a downward trend in the price of crude oil and recovery in supply will continue. However, things remain highly uncertain. If a shortage of crude oil and other supplies occurs in Asia, including Japan, and crude oil prices rise again from the fourth quarter of 2026 to the first quarter of 2027, it is estimated that Japan's real GDP growth rate for FY2026 will fall by 0.4%pt.

◆Due to rising inflationary pressures stemming from the situation in the Middle East, core CPI is projected to rise by +2.6% y/y in FY2026 and +2.2% in FY2027. We anticipate that the Bank of Japan will raise short-term interest rates to 1.00% as early as June 2026, and then raise them by 0.25%pt approximately once every six months thereafter.