Investing.com -- Japan's government warned on Friday that rising oil prices stemming from the Middle East crisis could create sustained inflationary pressure on the economy over the coming quarters.

The Cabinet Office projected in its March economic report that a sustained 10% increase in crude oil prices could push Japan's consumer inflation rate up by as much as 0.3 percentage point over roughly a year.

The government maintained its cautiously optimistic outlook that the world's fourth-largest economy was recovering moderately overall, while noting that attention should be paid to the economic repercussions of the Middle East crisis.

The Cabinet Office removed a reference to the impact from U.S. trade policies from its headline assessment for the first time since it appeared in April 2025.

On prices, the government changed its previous view that consumer prices were rising at a slower tempo to rising moderately.

Other assessments remained unchanged, including private consumption picking up and business investment moderately picking up.

The Cabinet Office cited deteriorating consumer sentiment data and output cuts among petrochemical manufacturers as trends that warrant attention.

Japan's economy grew an annualised 1.3% in the October-December quarter thanks to business and consumer spending. Prime Minister Sanae Takaichi's government has implemented measures from oil stockpile releases to fuel subsidies to cushion the impact on households and firms.

The Bank of Japan kept interest rates steady at 0.75% at its January and March meetings. The central bank on Thursday released a new gauge of consumer prices, in what analysts say is an effort to show underlying inflation on track for upcoming rate hikes.