Japan Economic Outlook 2026: GDP Growth, Inflation Forecast, and Monetary Policy Updates

Source: Dukascopy Bank SA
The Bank of Japan's Outlook indicates that Japan's economy is expected to grow at a moderate pace, supported by a "virtuous cycle" in which rising incomes drive higher spending. GDP growth forecasts for fiscal years 2025 and 2026 have been slightly revised upward due to government economic measures. Business profits remain high, and companies are investing in labor-saving technologies and digitalization, including AI, to address labor shortages. Exports are recovering as overseas economies improve, despite some tariff-related headwinds. Household incomes are expected to continue rising because of tight labor markets, and while consumption is currently flat due to high prices, it is projected to gradually improve as wages increase.



Inflation is expected to move in two phases. In the short term, the Consumer Price Index excluding fresh food is likely to slow below 2% in the first half of 2026 as past price spikes fade and government measures reduce costs. Over the longer term, inflation is projected to rise alongside wages as economic conditions improve and labor shortages persist, reaching levels consistent with the Bank's 2% price stability target by the second half of the projection period.

Economic and price risks are considered generally balanced, with close monitoring of global trade policies, the Chinese economy, and demand for AI-related investment, as well as domestic wage and price trends. With real interest rates at very low levels, the Bank plans to continue adjusting the policy interest rate and monetary accommodation as needed to achieve sustainable 2% price stability.
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