Oil Prices and Weak Yen, Japan Cuts Economic Projection

Residents walk in a modern area of Tokyo, Japan. The Japanese government has cut its economic growth projection for the 2026 fiscal year to 0.9 percent due to oil price pressures and a weakening yen. Photo: Pexels.

JAKARTA - The Japanese government has cut its economic growth projection for the 2026 fiscal year to 0.9 percent. The figure is down from the previous estimate of 1.3 percent after crude oil prices rose and the yen weakened against the US dollar.

Kyodo News, quoted Thursday, July 30, reported that the new projection was announced by the Japanese government on Thursday in a mid-year report. The 2026 fiscal year in Japan begins in April.

The pressure comes from two directions. Oil prices rose due to the conflict in the Middle East. At the same time, the yen weakened against the US dollar. For Japan, this combination is heavy because the country is highly dependent on energy and raw material imports.

The Japanese Cabinet Office estimates the yen at 161.4 per US dollar. The figure is much weaker than the January projection at 155.2 per US dollar.

Crude oil prices are also expected to rise to 92.5 US dollars per barrel. Previously, the government estimated that oil prices were at 68 US dollars per barrel.

The weakening of the yen makes import costs more expensive. The rise in oil prices adds to the burden because Japan is poor in natural resources and vulnerable to global energy price fluctuations.

The Japanese government said wage growth and household consumption were still helped by energy subsidies. However, the boost was not enough to contain the risk of expensive oil and a weak yen.

For the 2027 fiscal year, which begins next April, the Japanese government expects gross domestic product or GDP to grow by 1.1 percent. The projection is based on Prime Minister Sanae Takaichi's push to increase investment in crisis management and strategic growth sectors.

This policy is expected to encourage the recovery of household consumption and increase corporate capital investment.

However, the latest projection has not included plans to cut consumption taxes on food and beverages for two years starting April 2027. The impact on inflation and the business world has also not been calculated.

The Cabinet Office also updated the primary balance projection. The primary balance deficit in fiscal year 2026 is expected to widen to 1.2 trillion yen or about 7.3 billion US dollars. This figure is up from the deficit projection of 800 billion yen in June.

The deficit widened because the government needed to finance additional budgets for the current year.

The primary balance is the difference between government revenue, such as taxes, and government spending, excluding debt interest payments. This figure is often used to read the fiscal health of a country. If there is a surplus, the government can cover spending without having to issue new debt.

In a scenario of strong economic growth, Japan's primary balance is expected to turn into a surplus of 1.4 trillion yen in fiscal year 2027. The surplus is said to be able to offset additional spending of 10 trillion yen to encourage investment.

Takaichi's administration no longer emphasizes the old target of achieving a primary balance surplus within one year. The government is now choosing to gradually reduce the debt-to-GDP ratio over several years.

The criticism comes as the debt-to-nominal GDP ratio tends to be easier to fall when inflation makes the size of the economy look bigger.

Japan's fiscal problems remain heavy. Kyodo News noted that Japan's fiscal health is the worst among developed countries. Its total debt is more than twice the size of its economy.