Japan’s economy is transitioning to higher interest rates with domestic demand driven by private consumption and investment. AMRO suggests careful policy calibration for growth, stability, and fiscal sustainability.
Japan’s Economic Transition
Japan is adjusting to a “new normal” with higher interest rates and evolving growth dynamics. Domestic demand, driven by private consumption and investment, is crucial amid uncertain international conditions. Achieving growth while ensuring financial stability requires well-planned policies. Following its Annual Consultation Visit to Japan, the ASEAN+3 Macroeconomic Research Office (AMRO) highlighted these dynamics. Led by Lead Economist Runchana Pongsaparn, AMRO’s delegation discussed with Japanese financial leaders, including the Minister of Finance and the Bank of Japan Governor, about policy strategies to maintain momentum.
Economic Outlook and Challenges
After a slow start, Japan’s economy gained traction in mid-2025 due to increased consumption and exports. Dr. Pongsaparn projected a GDP growth of 1.0% for 2025, slowing to 0.6% in 2026 due to tariff impacts. Despite easing food-related shocks, inflation remains persistent, with core CPI at 2.9% as of September 2025, expected to decrease gradually. Japan’s external position remains robust, with a current account surplus bolstered by strong overseas income. Fiscal improvements are noted, with the deficit decreasing due to revenue growth and spending adjustments.
AMRO’s Recommendations for Japan
AMRO emphasizes a balanced policy approach to support Japan’s transition. The BOJ’s measured monetary policy should be data-driven, balancing inflation and growth. Fiscal policy must be agile to support vulnerable groups and address long-term challenges like aging and climate change. Additionally, monitoring property market trends is advised to prevent financial instability. Structural reforms to enhance productivity, innovation, and digital transformation are crucial for sustaining growth. AMRO appreciates Japan’s cooperation during consultations, underscoring the importance of ongoing dialogue for regional stability.
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