Economic overview of Japan

• Saadia Manzoor, Assistant Director JETRO Karachi Office

The year 2025 also marked a structural shift in Japanese politics. Following a landslide election victory in late 2025, Prime Minister SanaeTakaichi introduced aggressive stimulus measures, including a ¥21.3 trillion ($139 billion) package. The package focuses on mitigating inflation and securing Japan’s high-tech future. Key initiatives include suspending the sales tax on food and major investments in semiconductors and AI. The largest share of the package is aimed at easing household pressure from rising prices through the resumption of electricity and gas subsidies, the planned abolition of the provisional gasoline tax, a one-time payment to support families, and municipal-led relief measures. The package also accelerates Japan’s goal of raising defense spending to 2% of GDP.

Japan’s economy grew steadily at the beginning of fiscal year 2025, with GDP expanding by 1.5% and 2.1% in the first two quarters. However, growth turned negative in the third quarter, contracting by 2.3%, marking the first decline since 2024. This downturn was largely due to a widening trade deficit, as exports to the United States fell while Japanese policymakers negotiated lower tariffs. Nevertheless, moderate growth is expected to resume in the coming quarters. According to the Cabinet Office, the quarter on quarter growth is projected by 1.1% in the final quarter of 2025.

In 2025, Japan’s economy was characterized by a fragile recovery while transitioning to a higher interest-rate environment. The year also witnessed significant political shifts and a continued struggle against persistent inflation and external trade headwinds. The current recovery phase has been led by the service sector partly reflecting post-COVID-19 normalization while domestic private final demand continues to expand.

Exports declined, particularly for cars and auto parts affected by U.S. tariffs. Despite this, food exports reached a record high. Residential investment fell sharply due to stricter energy-efficiency standards implemented in April. Although these factors weighed on third-quarter growth, they are expected to be temporary.

Headline CPI remained elevated, often exceeding 3.0%, driven largely by food and energy costs. In response, the Bank of Japan (BOJ) raised short-term interest rates from near zero to 0.75% by December 2025, the highest level in 30 years, as part of its monetary policy normalization. Encouragingly, food inflation, while still high, is moderating. Price increases for fresh foods have eased, and energy inflation may also decline as global oil prices fall.

Looking ahead, headline consumer price inflation is expected to slow to below 2% in the first half of 2026. Government policy aims to shift from externally driven “cost-push” inflation to more sustainable, wage-driven “demand-pull” inflation.

Private consumption remained the primary engine of growth, supported by the strongest wage increases in decades during 2025. Employment has continued to rise despite an aging population. Japan’s employment rate stands at 80%, well above the OECD average of 70% in 2025.

Trade challenges continue for Japan and uncertainty persist particularly due to U.S. tariffs which range from 15% to 25% and the slowdown in China’s economy. Approximately 25% of Japan’s goods imports are denominated in yen, while nearly 70% are denominated in U.S. dollars, leaving the economy sensitive to exchange-rate fluctuations. Uncertainty also remains regarding global commodity prices however economic activity is projected to remain strong to moderate in 2026.

JETRO (Japan External Trade Organization) global offices are continuously conducting surveys and gathering information about the impact of US tariffs on the operations of Japanese companies worldwide and sharing such information for ease of business.

Copyright Business Recorder, 2026