Japan keeps economic view steady, flags Middle East and market risks

Japan kept its overall economic assessment unchanged in May, saying the economy was recovering at a moderate pace while flagging growing risks from the Middle East and swings in financial markets.

The Cabinet Office said private consumption was still showing movements of picking up, even as consumer sentiment had been weak recently. Business investment was still described as picking up, but exports were assessed as almost flat, underscoring an economy that was advancing without much momentum. The unchanged baseline view suggested Tokyo did not see an immediate domestic downturn, yet the warning about external shocks showed policymakers were watching energy prices, shipping routes and market volatility closely.

That caution comes as Japanese households were already showing strain. The Consumer Confidence Survey put the index at 32.2 in April, down from 33.3 in March. All four subcomponents weakened or were flat, including willingness to buy durable goods, which fell to 23.2. For Japan, that is a troubling signal: weaker sentiment can delay spending just as higher import costs begin to work through consumer budgets.

The Middle East risk is especially important because Japan is exposed through both trade and energy. Japanese vehicle exports to the region were nearly wiped out in April, and exports there account for about 4% of Japan’s total shipments. That share is not large, but it is enough to matter for automakers such as Toyota and Nissan if war-related disruption raises shipping and insurance costs or crimps demand.

The energy channel is more severe. Finance Ministry data showed Japan’s crude oil imports from the Middle East plunged 67.2% in April from a year earlier, the steepest drop since comparable records began in 1980. The value of those imports fell 55.5% over the same period. For an economy heavily dependent on imported energy, that kind of swing is a reminder that conflict around the Strait of Hormuz can ripple quickly into domestic prices, corporate margins and confidence.

Japan’s first-quarter growth had been stronger than expected, giving support to the case for more Bank of Japan rate increases. But the latest report, along with Economy Minister Minoru Kiuchi’s warning to stay alert to the Middle East conflict, shows that momentum is now facing a test from higher energy costs, disrupted trade flows and a market backdrop that could still turn against Tokyo.