Japan's Cabinet Office reduced the real GDP growth forecast for fiscal year 2026 to 0.9% from an earlier 1.3%, citing higher oil prices driven by Middle East tensions that are weighing on domestic demand [1, 2, 3, 4, 5, 6, 7]. The private consumption growth forecast was also downgraded from 1.3% to 0.9%, and capital expenditure growth was adjusted downward from 2.8% to 2.3% [1, 2, 7, 4, 5, 6]. Meanwhile, consumer inflation is expected to rise to 2.2%, up from the previous 1.9%, mainly due to the surge in energy costs [1, 2, 7, 4, 5, 6]. The government projects a 1.1% GDP growth for fiscal 2027, anticipating a strengthening of domestic demand [1, 2, 5].

On July 30, Prime Minister Sanae Takaichi announced plans to temporarily reduce the food and soft drinks sales tax from the current 8% to 1% starting April 2027. The cut will last for two years and aims to alleviate the burden of rising living costs amid inflation and energy price shocks [8, 9, 10, 6]. The tax rate was initially proposed to be zero percent but was revised to 1% due to technical constraints with retailers' cash register systems and political debates [8, 9, 10].

The ruling Liberal Democratic Party intends to fund the tax cut without issuing new debt, partly relying on potential tax revenue overruns. LDP Secretary-General Shunichi Suzuki said, "The premier said the government will secure funding that does not rely on debt issuance" [9].

The Bank of Japan held its policy interest rate steady at 1% on July 31 and lowered its core inflation forecast for fiscal 2026 to a range of 2.3%-2.7%, down from a previous 2.8%-3%. The central bank expects moderate economic growth supported by global AI demand despite ongoing energy price pressures [11].

Government forecasts also show nominal wages rising about 3.1% annually through fiscal 2027, expected to support positive real wage growth despite inflationary pressures [1, 2, 5]. Japan’s primary budget balance is projected to return to a surplus of 1.4 trillion yen (approximately $8.6 billion) in fiscal 2027 despite long-term fiscal challenges and a debt pile more than twice the country's GDP [1, 2, 5].

Japan is scheduled to release its GDP data for the April-June quarter 2026 on August 17 [1, 3, 4]. The government is expected to finalize the food tax cut plan in an upcoming cabinet meeting this month and submit the legislation in the autumn parliamentary session [9].