Japan's economy grew at a faster-than-expected annualised rate of 2.1% in the first quarter, powered by robust exports and a fifth consecutive rise in private consumption, preliminary data released by the Cabinet Office showed. The growth figure, which translated into a quarterly expansion of 0.5%, comfortably beat market forecasts of 1.7% and marked the second consecutive quarter of expansion. Corporate investment also contributed to the outperformance, while a rising GDP deflator—up 0.3%—suggested the world’s fourth-largest economy is finally shaking off decades of deflationary stagnation.

Yet the momentum faces a stern test. The full impact of the Iran war-driven energy crisis has yet to feed into the national accounts, with analysts in Tokyo warning that the second quarter will bear the brunt of soaring prices for fuel and staple goods such as rice. Viewed from the Middle East, the conflict has already disrupted supply chains and pushed up costs for Japanese importers, threatening to erode household purchasing power. Policymakers in Washington and London are monitoring the situation closely, as Japan’s vulnerability to energy shocks could ripple through global trade and financial markets.

The strong Q1 performance strengthens the case for the Bank of Japan to raise interest rates as early as next month, a step that would align with its gradual normalisation of monetary policy. Finance Minister Takaichi has signalled plans to draft a supplementary budget to safeguard growth amid the uncertainty, underscoring the delicate balancing act between supporting demand and containing inflation. Analysts in London note that Japan’s reliance on energy imports makes it particularly exposed to geopolitical shocks, and the BOJ will need to weigh the risk of stifling recovery against the imperative to curb price pressures.

Looking ahead, the durability of Japan’s expansion hinges on how quickly the energy crisis abates and whether export demand from Asia and the West holds up. The government’s ability to deploy fiscal buffers will be critical, but with public debt already among the highest in the developed world, the room for manoeuvre is limited. As one senior economist in Tokyo put it, the first quarter data offer a welcome respite, but the true test of Japan’s resilience is only just beginning.