Japan’s economy is transitioning toward a more domestically driven growth model, underpinned by strengthening private investment and consumption. GDP growth is projected to strengthen to 1.2 percent in 2025, before easing to 0.8 percent in 2026, as the initial boost from export frontloading fades and the full-year impact of tariffs weighs on external demand. With external uncertainty going forward, growth will rely on private investment and consumption supported by positive business sentiment and rising real wages.
Inflation momentum has also strengthened, reflecting a more entrenched wage–price cycle supported by tight labor market conditions and rising inflation expectations. Looking ahead, CPI (excluding fresh food) inflation is expected to remain elevated at 3.0 percent in 2025 and moderate to 2.2 percent in 2026, as government measures ease cost-of-living pressures, although firm wage growth continues to exert upward pressure on inflation.