Our economic outlook for Japan

Japan’s economy remains on a steady path toward normalization. We expect private consumption to remain firm, underpinned by strong wage growth, the positive effects of income tax cuts, and the potential for a fiscal stimulus package from a government that received an emphatic vote of confidence in February 8 snap elections. Corporate profits continue to be strong. We anticipate that software investments will address labor shortages and research and development spending will drive capital expenditure growth. We don’t see major risks to the domestic economy, as solid demand stems from a structural shift to a labor-shortage economy with continued high wage growth.

Underlying inflation continues to rise moderately. Although wage growth is likely to slow in 2026 compared with 2025 through nationwide negotiations, we foresee gains in the low 3% range. Against this backdrop, we expect labor-intensive service prices to rise and underlying inflation to remain intact, albeit with some volatility in the near term.

We anticipate that the Bank of Japan (BoJ) will remain committed to a gradual normalization of monetary policy. Importantly, the BoJ has emphasized that exchange rate movements are exerting a greater influence on domestic prices. This development reflects a structural shift in corporate behavior, as firms have adjusted wages and prices in response to external cost pressures. Given that the improving inflation dynamics are rooted in structural wage gains tied to persistent labor shortages, we expect two quarter-point rate hikes—which would raise the policy rate to 1.25%—by the end of 2026.