Japan's economy grew faster than expected in the first quarter of 2026, reinforcing market expectations that the Bank of Japan could move to raise interest rates as soon as June. Preliminary government data released on Tuesday showed GDP expanding 2.1% year-on-year in the January–March period, beating the consensus forecast of 1.7% and accelerating sharply from a revised 0.8% gain in the previous quarter. On a quarter-on-quarter basis, growth came in at 0.5%, topping the 0.4% estimate.

Private consumption — which accounts for more than half of Japan's economy — rose 0.3% after stagnating in the prior quarter. Capital expenditure also beat expectations, though it slowed to 0.3% from 1.4% previously. External demand contributed 0.3 percentage points to overall growth, supported by resilient exports and a weaker yen. The GDP price index, a broad measure of inflation, held at 3.4% year-on-year — well above the Bank of Japan's 2% target.

The stronger-than-expected data adds momentum to calls for further monetary tightening. A recent Reuters poll found that 65% of economists expect the Bank of Japan to raise its benchmark rate to 1.0% at next month's meeting. ING analysts maintained their forecast of two rate hikes totalling 50 basis points across 2026 — one in June and one in the fourth quarter — pointing to deeply negative real interest rates and healthy wage growth potential as key justifications.

Not everyone is optimistic about the trajectory ahead, however. Capital Economics analysts cautioned that GDP growth could stall in the second and third quarters, partly due to the fallout from the conflict in Iran and its impact on energy and import prices. Government measures to cap fuel prices are keeping inflation in check for now, the analysts noted, but that buffer is unlikely to hold as higher energy costs work their way through the supply chain.