Japan is expected to report a second consecutive quarter of economic growth next week, with exports likely cushioning the early effects of global uncertainty before the full cost of the Iran war and higher energy prices fed through to households and companies.

A Reuters poll published on May 15 showed economists expect real gross domestic product to have expanded at an annualized 1.7% in the January-March quarter. On a non-annualized basis, GDP was seen rising 0.4% from the previous quarter, following a 1.3% annualized expansion in October-December. The Cabinet Office is scheduled to release preliminary first-quarter GDP data on May 19 at 8:50 a.m. in Tokyo.

The forecast points to an economy still growing moderately at the start of the year, led by recovering exports and supported by private demand. For the Bank of Japan, the figures could help determine whether the economy retains enough underlying momentum to absorb another interest-rate increase, even as the global backdrop has become more difficult since the end of the quarter.

The GDP estimate is particularly important because Japan is entering a more complicated phase of its post-deflation transition. Wage growth, firmer services prices and more active corporate price-setting have strengthened the central bank’s argument that inflation is becoming more durable. At the same time, Japan remains highly exposed to imported energy costs, meaning a surge in crude oil prices can quickly squeeze real incomes, lift production costs and worsen the terms of trade.

That tension sits at the center of the first-quarter GDP debate. Economists surveyed by Reuters said the Middle East conflict appeared to have had only a limited negative impact on the economy during the January-March period. But they also warned that higher crude oil prices and supply constraints could intensify downside pressure later in the year if geopolitical disruption persists.

Private consumption, which accounts for more than half of Japan’s output, was expected to rise 0.2% in the first quarter. That would mark a modest but positive contribution from households at a time when consumers remain sensitive to food, fuel and utility costs. Consumption has been one of the weakest links in Japan’s recovery in recent years, as inflation has often outpaced gains in purchasing power. A positive reading would therefore suggest that wage increases and employment stability are still giving households some capacity to spend.

Capital expenditure was also projected to rise 0.2%, slowing sharply from the 1.3% gain recorded in the previous quarter. The slowdown would not necessarily signal a collapse in business confidence, but it would underline the uneven nature of corporate investment. Many Japanese companies continue to invest in labor-saving technology, digital systems and capacity upgrades, yet external uncertainty, higher import costs and currency volatility can make firms more cautious about committing to large projects.

The more decisive support came from trade. Net external demand, which measures exports minus imports, was expected to add 0.2 percentage points to first-quarter GDP growth after making no contribution in the fourth quarter. That suggests that export recovery helped offset the pressure from imports and gave Japan’s economy a buffer before the energy shock became more visible in corporate costs and household bills.

Trade data around the end of the quarter support that picture. Provisional figures compiled from Japan’s trade statistics showed exports exceeding imports in March, with exports at 11.003 trillion yen and imports at 10.336 trillion yen, producing a monthly balance of 667 billion yen. For April’s first 20 days, however, the provisional balance had turned negative, showing how quickly import costs and external conditions can alter the trade contribution.

The export cushion is central to Japan’s near-term outlook because domestic demand alone may not be strong enough to offset a sustained rise in imported energy prices. Japan imports most of its energy, leaving companies and consumers exposed when crude oil and fuel prices rise. The Bank of Japan’s April outlook warned that higher crude oil prices linked to the Middle East situation would likely slow growth in fiscal 2026 by pushing down corporate profits and household real income through a deterioration in the terms of trade.

That warning does not necessarily contradict the first-quarter growth forecast. Instead, it highlights the lag between a geopolitical shock and its macroeconomic impact. The GDP report due May 19 will mostly describe conditions before the full pass-through from higher oil and commodity prices. The data may therefore confirm that the economy entered the shock with momentum while still leaving open the question of how much growth will slow in subsequent quarters.

Inflation data already suggest that the shock is moving through the cost structure. Reuters reported separately on May 15 that Japan’s annual wholesale inflation reached 4.9% in April, the highest in about three years, as petroleum and chemical goods prices rose following the Iran-related energy disruption. The Bank of Japan also said in a regional survey-based report that firms ranging from food makers to hot spring operators were considering broader price increases around the summer as they passed on higher energy, raw material and labor costs.

For policymakers, that creates a difficult mix. Stronger GDP and resilient demand would usually support higher interest rates. But if inflation is driven heavily by import costs rather than demand, tighter policy could do little to improve the supply shock while increasing pressure on borrowers and rate-sensitive sectors. The BOJ must judge whether price increases are being absorbed through higher wages and stronger nominal incomes, or whether they are eroding real activity.

The OECD added to the policy debate this week by projecting that the BOJ’s short-term policy rate could rise to 2% by the end of 2027 from 0.75% currently. It argued that robust domestic demand, higher inflation expectations, wage growth and a closed output gap justified continued gradual rate hikes as Japan moves away from decades of near-zero inflation. The same assessment, however, acknowledged uncertainty from external headwinds and the need for caution.

The June BOJ meeting is therefore likely to hinge not only on the headline GDP number but also on the composition of growth. A stronger-than-expected reading led by consumption and capital investment would indicate that domestic demand can withstand higher prices and borrowing costs. A reading driven mostly by net exports would be more ambiguous, especially if trade support proves temporary or if the April deterioration in import costs continues.

Markets will also watch whether GDP confirms that the output gap remains firm enough to sustain wage-price dynamics. Japan’s spring wage negotiations have helped reinforce the BOJ’s view that companies and workers are adapting to an economy with rising prices. But wage growth must translate into real purchasing power to keep consumption from weakening. If food and energy costs accelerate faster than pay, household spending could lose momentum just as the central bank considers another rate increase.

Business investment faces a similar test. Japanese firms have strong incentives to invest because labor shortages remain structural and productivity demands are rising. Yet cost pressures from imported materials, logistics and energy can compress margins, particularly for smaller firms with less pricing power. A modest 0.2% rise in capital spending would show that investment has not stalled, but it would also suggest that corporate demand is not strong enough to remove downside risks.

The external sector remains vulnerable to two-way pressure. On one side, exports can benefit from resilient demand in key markets, supply-chain normalization and currency effects that support overseas earnings. On the other, Japan’s import bill can rise quickly when energy prices climb or the yen weakens. That means the same exchange-rate and commodity dynamics that support exporters can also weaken household real income and increase costs for import-dependent industries.

The first-quarter GDP forecast also matters for fiscal policy. If growth remains positive, the government may have less immediate pressure to deploy broad stimulus. But if higher energy prices begin to weigh more heavily on consumers, policymakers could face calls for targeted relief. Japan’s high public debt limits room for large-scale fiscal expansion, making the quality of growth and the persistence of inflation especially important for budget decisions.

For investors, the GDP release will feed into expectations for Japanese government bond yields, the yen and Japanese equities. A stronger report could support the view that the BOJ will continue normalizing policy, putting upward pressure on yields and potentially supporting the yen. But equities may respond differently depending on whether growth is seen as sustainable or as a backward-looking result that predates a cost shock. Exporters may benefit from trade resilience, while domestic-facing companies could be more exposed to household spending pressure.

The title risk for Japan is that the first quarter may look better than the economy feels by midyear. The Reuters poll suggests the economy was still expanding before the full war-related shock filtered through. The BOJ’s own outlook and regional price survey point to a more challenging second and third quarter, with energy costs, wholesale inflation and corporate pricing behavior likely to remain central issues.

Still, the expected GDP gain would be meaningful. It would show that Japan’s recovery did not depend on a single sector and that exports, consumption and investment all contributed at least modestly. That breadth matters because Japan’s economy has often struggled to sustain momentum when one driver weakens. Even limited growth in consumption and capex, combined with a positive trade contribution, would give the BOJ and government a stronger starting point as they assess the next phase of the shock.

The May 19 release will therefore be read less as a final verdict than as a baseline. If GDP comes in near the Reuters median forecast, Japan will have extended its growth streak into the first quarter. The bigger question will be whether that growth can survive the post-quarter rise in energy costs, broader price increases and the policy tightening debate now confronting the Bank of Japan.