The revised data released by the Cabinet Office of Japan shows that due to the weak corporate capital expenditure, the growth momentum of the Japanese economy has weakened in the first quarter of 2025, but the overall performance is still better than market expectations. The data shows that before the escalation of the conflict in the Middle East, the Japanese economy remained basically resilient, and the main uncertainty facing the future came from rising energy prices and geopolitical risks.

Revised data showed that Japan's real gross domestic product (GDP) grew by 1.8 per cent on an annualised basis in the first quarter, down from 2.1 per cent in the initial reading, but higher than the 1.3 per cent forecast by economists. On a quarter-on-quarter basis, GDP grew by 0.5 percent, in line with preliminary figures and above market forecasts of 0.3 percent.

Corporate capital expenditure has become the main reason for this GDP revision. According to the data, capital expenditure of Japanese companies fell by 0.7 in the first quarter, which was significantly lower than the 0.3 growth shown in the initial value, and also lower than the 0.9 per cent decline expected by the market. This adjustment mainly reflects the new enterprise plant and equipment investment data after the preliminary GDP announcement. The Cabinet Office pointed out that investment in areas such as custom software, computers and office equipment has fallen sharply.

Despite the contraction in capital spending, the market generally believes that this phenomenon is more like short-term volatility than a reversal of the long-term trend. The trend in spending on labor savings, automation and AI-related investments has not changed significantly.

Private consumption, which accounts for more than half of Japan's total economy, grew by 0.3 per cent, in line with the initial value, indicating that household consumption still maintained a moderate growth. External demand, that is, exports minus imports, contributed 0.3 percentage points to GDP growth; domestic demand contributed 0.2 percentage points. Both data are consistent with preliminary statistics.

As tensions continue in the Middle East, the Japanese economy is facing new downward pressure. The Japanese government this week confirmed a supplementary budget of about $19 billion to ease the burden on households caused by rising energy prices.

The Strait of Hormuz faces the risk of transport disruptions following the military strikes by the United States and Israel against Iran. The Strait bears about 1/5 of the world's oil and gas transportation volume. The market is worried that energy supply may be significantly affected, and international oil and gas prices have risen significantly.

As Japan is highly dependent on oil imports from the Middle East, rising energy costs will further push up domestic inflation, weaken the real purchasing power of residents, and reduce corporate profit margins. If the energy supply interruption lasts for a long time, the possibility of Japan's economy facing the risk of recession will increase significantly.

Economists generally believe that if tensions in the Middle East continue and lead to the long-term closure of the Strait of Hormuz, Japan's economic growth in the third quarter may stagnate or even shrink. However, given the upcoming second-quarter economic data and government fiscal support measures, the overall economy is still expected to maintain some resilience.

Japan's Ministry of Finance on MondayThe initial value of the international balance of payments in April showed that the current account maintained a surplus for 15 consecutive months, with a scale of 3.9078 trillion yen (about 164.9 billion yuan), a sharp increase of 64.9 percent year-on-year. Among them, the trade balance was a surplus of 395.7 billion yen, and exports increased by 13.9 to 10.1081 trillion yen year-on-year. Exports of electronic components such as semiconductors and non-ferrous metals performed strongly in the Asian market; imports increased by 9.5 to 9.7124 trillion yen. Affected by the deteriorating situation in the Middle East, Japan's imports and exports to the Middle East plummeted by 56.8 per cent and 55.8 per cent, respectively. The "first income and expenditure", which reflects overseas investment income, was 4.21 trillion yen, an increase of 15.3 per cent, and the depreciation of the yen led to an increase in dividends from overseas subsidiaries of the financial sector. The total number of tourists visiting Japan decreased by 5.5 per cent.

At the same time, the revised GDP data for the January-March quarter released by the Cabinet Office showed that economic growth slowed from the previous quarter. At an annualized rate of 1.8 per cent, it was lower than the initial 2.1 per cent but higher than the median market forecast of 1.3 per cent. Corporate capital spending fell 0.7 per cent, significantly weaker than the initial growth of 0.3 per cent, with a significant drag on industries such as custom software, computers and office machinery. Private consumption, on the other hand, grew by 0.3 per cent, unchanged from the initial level, indicating that household spending remains resilient. External demand contributed 0.3 percentage points and domestic demand 0.2 percentage points.

Economists believe that the weakness in capital spending is more like a temporary decline than a trend change, and labor saving measures and artificial intelligence-related investment are still on the rise. However, the uncertainty of energy supplies from the Middle East conflict poses a major risk. After the U.S. and Israel launched an attack on Iran at the end of February, the Strait of Hormuz was effectively closed, oil prices soared, and Japan, which is heavily dependent on Middle Eastern oil, faced pressure from rising fuel costs, rising inflation and weakening household purchasing power. The government has finalized a $19 billion supplementary budget for the current fiscal year to cushion the impact of energy costs on households.

The Bank of Japan will hold a policy meeting next week. The central bank is widely expected to push ahead with interest rate hikes this month unless a sharp escalation in the Middle East conflict triggers market turmoil. Nan Jian, a senior economist at Daiwa Securities, pointed out that the January-March data showed that the economy was resilient before the situation escalated. Combined with government measures, the economy is expected to remain stable, and the central bank may have to tend to raise interest rates. Makoto Kobayashi, chief economist of research and consulting at Mitsubishi UFJ, warned that if the Strait of Hormuz continues to close, the economy may stagnate or even shrink in the third quarter.

The Bank of Japan will hold a monetary policy meeting next week. At present, the market generally expects that as long as the Middle East conflict does not further escalate and cause serious turmoil in the financial market, the Bank of Japan will maintain the direction of gradually promoting the normalization of monetary policy. The central bank is now more concerned about the risk of sustained above-target inflation than a short-term slowdown in economic growth.