Japan: 2026 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan

The 2026 Article IV Consultation highlights that the Japanese economy has displayed impressive resilience in the face of global shocks and output is growing above potential. Domestic demand remains robust, supported by low unemployment and strong private sector activity. Following three decades of near-zero inflation, prices exceeded the Bank of Japan’s target for over three and a half years before moderating recently. Although nominal wages are rising at a historic pace, elevated inflation has weighed on household purchasing power, sustaining cost-of-living concerns. Growth is expected to remain solid in 2026 but slow to 0.8 percent amid weaker external demand and spillovers from the Middle East conflict. Private investment and consumption are projected to stay resilient, with easing inflation supporting gradual real wage gains despite ongoing labor shortages. Fiscal outcomes have recently outperformed expectations; however, the deficit is set to widen, driven by rising interest costs and age-related spending. Over time, these pressures could increase the debt-to-gross domestic product ratio. Sustained fiscal prudence and gradual monetary tightening will be essential to maintain stability and ensure long-term sustainability.