Our economic outlook for Japan

The Japanese economy continues to expand at a moderate pace. Export resilience, strong wage growth, recovering consumer spending, solid corporate investment, and increasingly supportive fiscal policy are underpinning economic strength.

The rising wages and stronger household spending, along with an economy running above its estimated sustainable capacity, suggest inflation is becoming more self-sustaining and demand-driven. Although services inflation continues to lag goods inflation, sustained wage growth should enable firms to pass higher labor costs through to consumers more effectively over time. This would support a further pickup in services inflation and reinforce the durability of the inflation cycle.

On September 18, the Bank of Japan (BoJ) decided to raise its policy interest rate by one-quarter of a percentage point to 1.25%. Policymakers assessed risks to growth as broadly balanced while judging risks to inflation as tilted to the upside. This reflects the potential for a further shift in corporate wage- and price-setting behavior, alongside continued increases in medium- and long-term inflation expectations.

Increasingly, the BoJ must balance inflation expectations, currency stability, and rising government bond yields, making policy normalization as much a matter of credibility as inflation management.

We expect an additional 25-basis-point rate hike by the end of 2026, which would take the policy rate to 1.5%. The timing of a hike will depend on incoming inflation, wage, and activity data, as well as the extent of yen weakness and its implications for inflation expectations.