(MaceNews) – Japanese government leaders remain cautiously optimistic about their gradual economic recovery scenario but warned that the Mideast war is now the biggest source of global uncertainty while downgrading its view on the U.S. economy for the first time in 10 months.

In its monthly report for March released Friday by the Cabinet Office, the government basically maintained its core assessment but shifted its focus from the drag from stiff Trump tariffs, saying that the economy is “recovering at a moderate pace but the impact of the situation in the Middle East needs a close attention.”

Last month, it said the economy was “recovering at a moderate pace, although the effects of the U.S. trade policy remain.” The official overview was last upgraded in August 2024, following a downgrade in February that year.

Earlier on Friday, the cabinet of Prime Minister Sanae Takaichi decided on a stop-gap budget worth ¥8.6 trillion to cover the first 11 days of fiscal 2026 starting April 1, which would allow the government to provide uninterrupted social security payments and transfers to prefectures. It was sent over to parliament for deliberation and is expected to win full Diet approval by March 30.

The record high ¥122.3 trillion budget for the upcoming fiscal year has already cleared the lower house but there is not enough time to discuss it in the upper house before April 1 because the Feb. 8 general elections delayed the start of the annual 150-day Diet session by about a month.

The government report also came a day after the ⁠Organisation for Economic Co-operation and Development maintained its global growth forecast at 2.9% for 2026 while only slightly revising down its 2027 outlook to 3.0% from 3.1%. The OECD expects Japan’s GDP to post a modest 0.9% gain in each of those two years, unchanged from its previous call and follows a 1.2% rise in 2025.

Relative resilience in global growth is expected to come from “robust technology-related investment and gradually lower effective tariff rates,” the OECD said. But it also warned that the Iran war “weighs on growth and generates significant uncertainty around global demand.”

In its monthly report, the government repeated its vow that with the Bank of Japan it “will continue to work closely together to conduct flexible policy management in response to economic and price developments.” It expects the BOJ “to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, by conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”

The government also repeated its slogan to build a “strong Japanese economy,” mainly by focusing fiscal spending on growth areas including artificial intelligence, semiconductors, shipbuilding, aerospace, ocean and defense among other industries, and also by seeking stable inflation led by sustained wage hikes, instead of being pushed up by higher import and production costs.

Those goals reflect the idea of a “proactive” but “responsible” fiscal policy stance aimed at investing in developing resources and capacity that can enhance Japan’s economic security and independence. It was first launched by Prime Minister Takaichi when she took office in October. She was re-elected in parliament in February after having led the ruling conservative Liberal Democratic Party to a landslide win in the lower house, ensuring a stable administration, although the ruling coalition lacks a majority in the upper house.

In its near-term outlook, the government also shifted its focus toward the heightened geopolitical risks in the Gulf region, saying “The improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the situation in the Middel East needs a close watch.” Last month, it warned about the effects of the protectionist U.S. trade policy.

The government left out its concerns about the punishing effects of high costs of daily necessities as the pace of food markups continues to slow and energy prices are posting year-on-year drops, mainly thanks to subsidies. It repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”

As for overseas economies, the government maintained the core of its assessment after downgrading it for the first time in eight months in January, but it also warned about the Iran war that has boosted global crude oil prices and raised concerns about supply of fertilizers and other commodities as Tehran has effectively blocked the Strait of Hormuz, the crucial shipping route for the world.

“The world economy continues to show gradual recovery while some regions are showing weakness,” the government said, “However, the uncertainty over the global economy including the situation in the Middle East is growing.” Last month, it noted that uncertainty remained after the United States raised tariffs again.

Looking at regions, the government downgraded its view on the U.S. economy for the first time since May 2025, pointing to slower consumer spending and concerns about job creation. It said the world’s largest economy is “expanding moderately, although showing weakness in some areas.” Previously, it was expanding moderately despite lingering uncertainties.

The government maintained its view that the Eurozone is “showing signs of a pickup” while upgrading the German economy for the first time in 10 months. Tokyo sees China as “slowing gradually.” The official view on the world’s second-largest economy was downgraded for the first time in 18 months in the January report.

Key points from the monthly report:

The government maintained its assessment of private consumption that accounts for about 55% of the GDP, saying that it is “showing signs of a pickup.”

Japan’s real average household spending fell 1.0% on year in January after a 2.6% dip in December, unexpectedly posting a second straight drop and a fifth in 12 months. Consumers remain cautious amid falling real wages. The latest trend is to simplify ceremonies and spend less on wedding and funerals while focusing on food and other daily necessities. There is also a widespread move to switch to more affordable mobile communications plans.

The January decrease in real average expenditures by households with two or more people was led by the 10th straight y/y decline in both gift money and mobile communications charges as well as a volatile factor of private university tuition fees. The decline was partly offset by higher spending on hotels, heat pumps and eating out (sushi). Excluding home maintenance and repairs and other volatile items like vehicles and gift money, the core measure showed a smaller 0.4% fall on year.

The government continues to describe industrial production as being “flat.”

February data due Tuesday is projected to show Japan’s industrial production posted its first month-on-month drop in three months, down 2.0%, after an upwardly revised 4.3% jump in January (+2.2% in the initial reading) and a 0.6% rise (revised up from being flat) in December. The increase in January was driven by a rebound in the output of passenger cars. It also reflected rush exports of computer chips, non-ferrous metals and plastics ahead of the holidays in China and some other Asian countries around the Feb. 17 Lunar New Year.

The monthly survey by the Ministry of Economy, Trade and Industry released last month (before the METI’s annual update to seasonal adjustments) indicated that output would slip back 1.9% on the month in February, led by computer chips and metal products, before dipping a further 2.6% in March due to a pullback in electric and information equipment (including radars) as well as general machinery.

The government maintained its assessment of exports, saying they are “largely flat.”

Trade data released last week showed Japan’s export values posted their sixth straight rise on the year in February but the pace of increase decelerated to 4.2% in payback for rush shipments to Asia before the Feb. 17 Lunar New Year that saw overall January exports jump 16.8%.

The modest increase in February was driven by computer chips, mineral fuels and construction machinery, which was partly offset by lower shipments of chip-making equipment and iron and steel. Stiff U.S. tariffs are hurting the auto industry and steel mills but exports have shown some resilience, thanks to solid demand from Europe and Asia.

Other details:

The government’s assessment of key components of the economy in the monthly economic report:

Private consumption is “showing signs of a pickup” (unchanged; upgraded in September 2025; downgraded in February 2024).

Business investment in equipment and software is “picking up moderately” (unchanged; upgraded in September 2025; downgraded in November 2023).

Housing construction “has a weak undertone” (unchanged; upgraded in August 2024; downgraded in August 2025).

Public investment is “firm” (unchanged; upgraded in August 2025; downgraded in December 2025).

Exports are “largely flat” (unchanged; upgraded in February 2025; downgraded in July 2025).

Imports are “largely flat” (unchanged; upgraded in May 2025; downgraded in November 2025).

Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).

Corporate profits are “showing signs of improvement despite the effects of the U.S. trade policy” (unchanged; upgraded in February 2026; downgraded in August 2025).

Business sentiment is “largely flat” (unchanged; upgraded in December 2023; downgraded in April 2025).

The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; downgraded in January 2023).

Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).

Domestic corporate goods prices are “rising gradually” (unchanged; last changed in November 2025).

Consumer prices are “rising moderately” vs. “showing a slower pace of increase” (wording changed; last changed in February 2026, the first change since November 2024).