Our economic outlook for Japan

Japan’s economy continues to move steadily toward normalization. We expect private consumption to remain resilient, supported by robust wage growth, the positive effects of income tax cuts, and the potential for fiscal stimulus. Corporate profits remain elevated. We anticipate that capital expenditures will be driven by software investments aimed at alleviating labor shortages as well as research and development spending that is less sensitive to the economic cycle. We foresee limited downside risks to the domestic economy, as solid demand reflects a structural shift toward a labor‑shortage economy with sustained wage growth.

Higher oil prices stemming from the conflict in the Middle East represent a significant inflationary risk. Most of Japan’s oil comes from the Middle East, although Japan’s relatively deep oil reserves would act as a buffer.

Inflation continues to edge higher amid firm wage growth. We expect labor‑intensive services prices to rise, contributing to a gradual pickup in inflation. In the short term, however, easing food price gains and strengthened energy price controls could temper inflation.

We expect the Bank of Japan (BoJ) to remain committed to a gradual normalization of monetary policy. Notably, the BoJ has emphasized that exchange rate movements now have a greater influence on domestic prices, reflecting a change in corporate behavior as firms have raised wages and prices in response to external cost pressures. We expect two quarter-point rate hikes—which would raise the policy rate to 1.25%—by the end of 2026.