Slow Growth & Sticky Inflation: Japan’s Economy in 2026
15 October 2026
The latest economic update from the Ministry of Foreign Affairs & Trade shows Japan’s economy has kept growing modestly over the past six months, with second-quarter GDP revised up to 1.4% annualised on exports, combined with strong corporate earnings and rising real wages. But the picture is uneven: private consumption is flat, while oil costs linked to the Middle East and a weak yen have kept inflation above targets. That leaves the Bank of Japan caught between hiking to contain prices and waiting to protect a fragile recovery.
SUMMARY
Japan’s Cabinet Office projects real GDP growth of 0.9% for the 2026 financial year (April 2026 to March 2027).
Preliminary data for July 2026 indicates that Japan’s current cycle of economic growth may have become its longest period of economic expansion since the end of World War II, the current period beginning in May 2020 following COVID-19 pandemic lows.
Government projections for real GDP growth for the current financial year have been revised downward, with private consumption and corporate investment weaker than expected. Continued increases in real wages provide some cause for optimism. The Bank of Japan raised interest rates to 1.25% on 18 September.
Inflation remains above Japan’s 2% target rate, at 2.5%. Some economic commentators assess that the Bank of Japan may increase the speed of future rate rises, from approximately every six months to quarterly. For the year ending June 2026 New Zealand total exports to Japan grew by 6.4% to NZD 4.85bn, with aluminium and meat exports increasing significantly due to rising commodity prices. Japanese imports into NZ increased by 20.4% to NZD 5.12bn, largely due to the increase in fuel (mainly diesel) imports.
Economic outlook
The Japanese Cabinet Office projects real GDP growth for the 2026 financial year (April 2026 to March 2027) to be 0.9%. This would represent a slight increase over 0.8% growth in the 2025 financial year. Growth projections were revised downward, compared to earlier projections made in January 2026, with real GDP growth for the 2026 financial year then projected at 1.3%. Real GDP growth for the second quarter (April – June) was below expectations at 0.3%, compared to the previous quarter.
Private consumption had been weaker than expected and corporate investment was also down. Real wages rose by 2.4% in July, compared to a year earlier. This was the biggest real wage increase recorded since May 2021 and marks seven consecutive months of real wage increases.
The Cabinet Office’s Economic Watchers Survey highlighted the economic challenges posed by the impacts of the Middle East conflict and the Kumamoto Earthquake in July 2026. Preliminary data from the Cabinet Office for July 2026 also showed that the current cycle of economic expansion is highly likely to have become the longest period of economic expansion since the end of World War II. This is subject to formal determination by the Cabinet Office. The previous longest period was from February 2002 to February 2008, known as the Izanami boom.
The current period of economic expansion began as the economy recovered from COVID-19 pandemic lows in May 2020. From October 2020 to June 2026 annualized quarter-on-quarter real growth was 1.3% (the July-September 2020 quarter being excluded when the real GDP growth rebounded sharply over COVID-19 lows). This was slightly behind the 1.6% average during the Izanami boom. Strengthening the yen? The yen remains historically weak against the US dollar, but it has recently recovered somewhat. After falling to around JPY 164/USD in late July, the currency strengthened to the JPY 154-155/USD range by mid-September, an appreciation of roughly 6%.
On 18 September the Bank of Japan raised interest rates to 1.25%, a rate increase of 0.25%. This is the highest level since 1995. The Bank of Japan indicated it would be monitoring inflation closely. The Bank of Japan forecasts the Consumer Price Index (excluding fresh food and energy) to be at 2.5% in the 2026 financial year and decrease to 2.2% during the 2028 financial year, closer to its 2% inflation target. Fuel and energy subsidies have insulated Japan somewhat from inflationary pressures caused by conflict in the Middle East. Some economic commentators have assessed that the risk of rising inflation may lead the Bank of Japan to raise interest rates on a quarterly basis, rather than every six months, going forward. Accelerating interest rate increases would help to strengthen the yen but also increase government borrowing costs.
The government’s plan to temporarily lower consumption tax on food items from April 2027 may help dampen inflationary pressures. International Trade Snapshot Japan’s exports increased by 19.3% for the month of August 2026, compared to the same month the previous year. This marked 12 consecutive months of export increases. However, imports rose more quickly, seeing a 28.0% increase. This led Japan to record a trade deficit of JPY 1.1tril (NZD 12.3bn) for the month of August, the fourth straight month of trade deficit. Increasing oil prices due to the crisis in the Middle East are seen as a major contributing factor for Japan’s trade deficit.
The weak yen continues to support strong export growth. The Bank of Japan released figures showing export prices in JPY rose by 17.9% for the year ending August 2026. Rising semiconductor prices, as well as other electronic components, supported strong export growth. But the weak yen has also made imports more expensive, with import prices rising 24.8% over the same period. Trade with New Zealand For the year ending June 2026 two-way trade was NZD 9.96bn with exports at NZD 4.85bn and imports at NZD 5.12bn. This represents a 6.4% increase in exports and a 20.4% increase in imports compared to a year ago. During this period Japan was New Zealand’s sixth-largest trading partner and fourth-largest export market.
Ministry of Foreign Affairs & Trade, October 2026