Expert says Japan may be taming inflation but other threats loomーNHK WORLD-JAPAN NEWS

Key Concepts

• Inflation: A general increase in prices and fall in the purchasing value of money.
• Real Wages: Wages adjusted for inflation, reflecting the actual purchasing power of earnings.
• Nominal Growth Rate: Economic growth measured in current prices, without adjusting for inflation.
• Real GDP Growth Rate: Economic growth adjusted for inflation, reflecting the actual increase in the quantity of goods and services produced.
• Strategic Fiscal Spending: Government spending aimed at boosting specific industries or sectors to enhance competitiveness.
• Yen Depreciation: A decrease in the value of the Japanese Yen relative to other currencies.

Economic Outlook for Japan: 2026

The Japanese economy in 2025 presented a duality: strong performance in exports and the stock market contrasted with stagnant household spending due to wage-inflation discrepancies. This report details economist Kandi’s forecasts for 2026, focusing on inflation, wages, government policy, and potential risks.

Inflation Forecasts & Contributing Factors

Kandi, a senior economist at Daiwa Institute of Research, predicts a significant decrease in inflation for 2026, forecasting a rate of approximately 1.6%. This projection is primarily driven by a deceleration in food price increases compared to 2025. Specifically, he highlights rice production exceeding demand as a key factor creating downward pressure on prices, following a substantial contribution to food price inflation in the previous year. Government interventions aimed at suppressing energy prices are also expected to contribute to this decline.

Wage Growth & Consumer Spending

Positive momentum is anticipated on the wage front. Kandi forecasts average pay increases exceeding 5% during the spring wage negotiations, mirroring the gains observed in 2025. This optimism is supported by the continued profitability of both manufacturing and non-manufacturing companies, despite the challenges posed by tariffs imposed by the Trump administration. He posits that companies possess the financial capacity to accommodate wage increase demands. Furthermore, the ongoing labor shortage, coupled with a slowing rise in the cost of living due to lower inflation, is expected to boost real wages and, consequently, encourage increased consumer spending.

Government Fiscal Policy & Potential Drawbacks

Prime Minister Takai Sai’s administration is pursuing a strategy of strategic fiscal spending to stimulate economic growth and enhance the global competitiveness of Japanese firms. However, Kandi expresses skepticism regarding the overall positive impact of this policy. He argues that proactive spending focused on specific industries could inadvertently fuel inflation, leading to a rise in the nominal growth rate without a corresponding increase in the real growth rate. This scenario, he warns, would effectively impose an “inflation tax” on the population and potentially drive up long-term interest rates, ultimately suppressing economic activity. As Kandi states, “Proactive spending to support some industries may create inflation, and that inflation could make the nominal growth rate rise. But if the country’s real growth rate does not rise, people would end up shouldering the burden in the form of an inflation tax.”

GDP Growth & Potential Risks

Considering these factors, Kandi anticipates a moderate economic recovery for Japan in 2026, with a projected real GDP growth rate of around 0.8%. However, he cautions against potential downside risks. These include a reduction in export demand from key trading partners like the US and China, and a sharp depreciation of the Yen, which could exacerbate price increases and negatively impact household spending. He emphasizes the importance of a rise in consumer confidence following the expected slowdown in price increases to sustain stable growth throughout the year. He notes, “In 2026, we need to be on the alert for the downside risks of reduced demand for exports, including from the US and China.”

Synthesis

The outlook for the Japanese economy in 2026 is cautiously optimistic. While inflation is expected to decline and wage growth to continue, the effectiveness of government fiscal policy and external economic factors remain key uncertainties. The success of the recovery hinges on translating lower inflation into increased consumer confidence and mitigating the risks associated with global demand and currency fluctuations. The interplay between nominal and real growth, as highlighted by Kandi, will be crucial in determining the overall economic well-being of the Japanese population.