Japan’s Economy: Monthly Outlook (Feb 2026)

◆In light of the announcement of the Oct-Dec 2025 GDP 1st preliminary results, we have revised our economic outlook. We now see growth in Japan’s real GDP according to our main scenario at +0.7% in FY2025, +0.8% in FY2026, and +0.9% in FY2027. (On a calendar year basis, we expect +0.6% in 2026 and +1.0% in 2027).

◆Real wages should remain positive on a y/y basis, due to factors such as the continuation of a high level of wage increases in the spring labor negotiations, and a decline in the inflation rate. Government economic measures, a continued accommodative financial environment, and a high level of household savings are expected to support or boost the Japanese economy. In addition, the facts that the inventory cycle is seen to be entering an “accumulation phase” and that the capital stock cycle suggests an increase in capital expenditure are also positive factors.

◆On the other hand, continued vigilance is needed regarding downside risks to external demand, particularly from the US and China. In the US, inflation could rise higher than anticipated, potentially prolonging a tightening monetary policy environment or leading to a renewed escalation of Trump tariffs. Japan-China relations remain significantly strained since the fall of 2025, raising concerns that the recovery in the number of Chinese visitors to Japan could lag behind expectations or that procurement difficulties for rare earths and other materials could arise.

◆We assume that the Bank of Japan (BOJ) will raise the short-term interest rate to 1.00% in the Apr-Jun period of 2026 while closely monitoring the economy, prices, and financial situation, followed by additional rate hikes at a pace of once every six months, 0.25%pt at a time. The short-term interest rate is expected to reach 1.75% by the end of the forecast period. Real interest rates are expected to remain negative throughout the forecast period, and monetary conditions are likely to remain accommodative for the time being.