Japan's economy is growing beyond expectations.

DNO - The Japanese economy grew by 2.1% year-on-year in the first quarter of this year, exceeding analysts' expectations, thanks to improved consumer spending and strong exports. This marks the second consecutive quarter of economic growth for the country.

Consumers shop at Ameyayokocho market in Tokyo, Japan. Photo: Japan-experience

According to CNBC, this growth rate for the Japanese economy is significantly higher than the average estimate of 1.7% from analysts surveyed by Reuters, and surpasses the 1.3% recorded in the previous quarter.

On a quarterly basis, the Japanese economy grew by 0.5%, exceeding market forecasts of 0.4% and improving on the 0.3% growth projected for the end of 2025. Compared to the same period last year, GDP increased by 0.6%. This demonstrates the strong resilience of the national economy, despite rising energy prices due to conflicts in the Middle East.

Notably, exports grew better than expected, reaching 11.5% year-on-year in March 2026, partly due to a surge of 29.3% in semiconductor equipment exports.

In addition, increased consumer and business spending contributed to this positive result. Higher government spending also supported the growth momentum. According to preliminary data from the Japanese Cabinet Office, personal consumption increased 0.3% year-on-quarter, equivalent to an annual growth rate of 1.1%. AP reports that the Japanese economy contracted during the July-September period last year, followed by a slight 0.2% year-on-quarter growth during the October-December 2025 period.

Japanese Prime Minister Sanae Takaichi recently pledged efforts to ensure ample supply to sustain growth. Achieving this may require significant government spending.

In a recent report, analysts at the Japan Center for Economic Research stated that Japan could maintain moderate growth, supported by increased spending on artificial intelligence (AI) technology and defense.

However, Norihiro Yamaguchi, chief economist for Japan at Oxford Economics, told CNBC that while export growth driven by strong IT demand may offer some short-term support, higher energy prices coupled with increased uncertainty will begin to constrain consumption and investment.

Similarly, at its most recent meeting on May 7th, the Bank of Japan projected that the country's economic growth is likely to slow this year. This is due to the high price of crude oil caused by the Middle East crisis, which could reduce corporate profits and real household income.

Rising energy costs are contributing to higher prices, and strong growth in the first quarter could lead the Bank of Japan to lean toward raising interest rates, abandoning its policy of keeping rates near or below zero for many years.

On May 18, Reuters reported that Tokyo is likely to issue more debt to supplement its budget. This move aims to mitigate the economic impact of the conflict in the Middle East, amid Japan's need to subsidize its energy bills.

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