17.11.2025
Japan’s economy is projected to maintain moderate growth driven mainly by domestic demand. After stagnating in 2024, activity rebounded in early 2025 supported by resilient household spending, investment and stronger car exports, but growth is expected to soften in the second half of 2025 as US tariffs weigh on exports. Real GDP growth is forecast at 1.1% in 2025 and to moderate to 0.7% in both 2026 and 2027. Inflation is projected to ease from 3.2% in 2025 to 2.2% in 2026 and 2.0% in 2027, allowing real wages to turn positive. The labour market is expected to remain tight with unemployment broadly stable around 2.5%. The general government deficit is projected to narrow slightly in 2025 before widening again from 2026 due to spending pressures, while gross public debt is forecast to hover around 240% of GDP by 2027.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 1.1 | 0.7 | 0.7 |
| Inflation (%, yoy) | 3.2 | 2.2 | 2.0 |
| Unemployment (%) | 2.5 | 2.5 | 2.5 |
| General government balance (% of GDP) | -1.4 | -1.9 | -2.0 |
| Gross public debt (% of GDP) | 244.9 | 242.2 | 239.9 |
| Current account balance (% of GDP) | 4.1 | 3.9 | 3.8 |
Domestic demand set to sustain moderate growth
After stagnating in 2024, Japan’s economy exceeded expectations in the first half of 2025, supported by resilient household spending and investment as well as stronger car exports ahead of looming US tariffs. Activity is expected to soften in the second half of 2025 following a decline in exports over the summer linked to US tariffs on autos and auto parts, though exports are projected to recover gradually, with early signs of improvement visible in September. Domestic indicators point to weaker manufacturing but improving services activity, while household spending continued to rise and consumer sentiment improved despite persistent inflation. Overall, growth in 2025 is expected to be supported by private consumption and investment, while net exports are projected to weigh on growth as imports recover more strongly. GDP growth is forecast at 1.1% in 2025 and to moderate to 0.7% in 2026 and 2027, with domestic demand remaining the main growth driver and net exports broadly neutral over 2026-27.
Labour market tensions persist
Japan’s labour market remains tight, though some moderation has emerged. Employment growth has slowed and the job-to-applicant ratio has eased, while labour shortages remain widespread. The unemployment rate is projected to stay broadly stable at around 2.5% through 2027. Nominal wage growth is expected to moderate, but real wages are projected to turn positive as inflation eases.
Inflation eases but remains elevated
Headline inflation has been slowing since early 2025, supported by government energy subsidies and moderating food price increases. Inflation is projected to decline from 3.2% in 2025 to 2.2% in 2026 and to 2.0% in 2027. Monetary policy is expected to remain broadly accommodative, with further interest rate hikes likely postponed until 2026.
Public deficit set to widen again
The general government deficit narrowed in 2024 and is projected to narrow slightly further in 2025 as temporary subsidies are reduced and activity remains solid. As the economy slows and spending pressures rise, the deficit is expected to widen again to around 2% of GDP in 2026 and to remain broadly stable in 2027. Gross public debt is projected to decline gradually to around 240% of GDP by 2027, mainly due to nominal GDP growth.
Source: European Commission. European Economic Forecast, Autumn 2025.
