Japan

Japan has been a slow performer among peers, with its GDP growing on average by +0.5% over 2000-2019 and +1.2% over 2010-2019, a moderate pace compared to other advanced economies or the Asia-Pacific region. In 2023, real GDP recovered to its 2019 level with growth picking up to +1.2%. GDP slowed in 2024 to +0.1%, and we expect a rebound of +1.4% in 2026 and +1.0% in 2027 (after +1.4% estimated in 2025). The slowdown in 2024 was mainly due to lower private consumption in the context of high costs of living. Improvements in 2026 are supported by rising wages and easing inflation, and government measures (such as subsidies, tax cuts and oil price regulation). Fundamentals for Japanese exports are bright, but their performance risks being capped by more protectionist US trade policy. Over the longer term, Japan should return to its pre-pandemic, structurally low growth rate of below +1% per year. On the one hand, the medium-term economic performance will be supported by resilient global and domestic demand, higher public investment as well as a competitive environment. On the other hand, labor shortages caused by an aging population will curtail Japan’s growth prospects. Business insolvencies should decrease by -1% in 2026 and -2% in 2027 (after +15% in 2024 and estimated +3% in 2025).

Inflationary pressures were scarce in Japan until recently. Headline consumer price inflation averaged 0.5% over 2010-2019, including three deflationary years. Inflation accelerated to an average of 2.5% in 2022 (although well below the global rate of 8.2%). In 2023, inflation came in at around 3.3% – a 30-year high in Japan (while global inflation decreased to 6.2%). Against this backdrop, in March 2024, the Bank of Japan, (BoJ, the central bank) exited negative interest rates, which had been in place since 2016, and raised further its policy rate in July 2024, January 2025 and December 2025. Quantitative easing was also scaled back. After 3.2% in 2025, we expect inflation to  temporarily slow to 1.9% in 2026 (on the back of tax cuts), before rising to 2.4% in 2027.

Fiscal policy was eased significantly during the pandemic and we expect the government to continue to support household incomes and encourage rising wages and workforce training in the next few years. Defense spending is also likely to be further raised. On the corporate side, the government will keep incentivizing efforts towards digitalization and innovation (especially when it comes to semiconductors and the green transition). However, Japan’s neighbors in the Asia-Pacific region will pose strong competitive obstacles to the country’s development in the semiconductor industry.

Japan’s business environment is relatively well-positioned in our assessment of 185 economies, rated in the best range in the majority of the sub-components, although it seems to be slightly deteriorating. The 2025 Heritage Foundation’s Index of Economic Freedom survey assigns Japan rank 28 out of around 185 economies, reflecting particularly good scores with regards to property rights, judicial effectiveness, government integrity and monetary freedom, while there remains room for improvement regarding government spending, and fiscal health receives an alarmingly low score. Meanwhile, the World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business friendly and the level of corruption is low. Our proprietary Environmental Sustainability Index puts Japan at rank 117 out of 210 economies, reflecting strengths in water stress and CO2 emissions per GDP, but weaknesses in terms of the recycling rate and renewable electricity output while energy use per GDP has recently been deteriorating.