Japan 1Q GDP Data and BOJ Policy Outlook

Japan's 1Q 2026 GDP grew 0.5% QoQ, though underlying 'trading gains' data reveals a worsening of the economy's terms of trade due to energy prices and yen weakness. BOJ Governor Ueda signals that a June rate hike remains possible as he monitors strengthening inflation expectations.

Key Takeaways

• 1.Japan's 1Q 2026 GDP grew by 0.5% QoQ, but the positive headline masks deteriorating terms of trade and increasing income outflows due to the Iran conflict's impact on energy prices and the yen.
• 2.BOJ Governor Ueda remains mindful of upside risks to prices despite the Iran conflict, keeping a June rate hike on the table as he monitors inflation expectations and price pass-through.
• 3.The Japanese government may use the satisfaction of the 'Domar condition' (g > r) in FY2025 to justify further fiscal expansion in the upcoming FY2026 supplementary budget.

Table of Contents

• Some signs in the 1Q GDP data of the Iran situation already impacting the domestic economy / Latest comments by BOJ Governor Ueda
• How might BOJ monetary policy be influenced by evidence in the 1Q GDP statistics that the Iran situation has already started to impact the domestic economy?
• The government's take on the GDP numbers, the Domar condition, and a FY2026 supplementary budget

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