Yasuko Koido 
We expect the ongoing memory chip shortage to be particularly harmful for the purchasers of traditional memory chips such as electronics, electrical machinery, and automobile manufacturers. The IT services sector will also be hit, but strong demand for AI and higher profit margins will partly shield them.
We have upgraded our outlook for business investment and productivity in Japan following the December transition to 2020 as the base year used to estimate GDP. The new figures show that software investment by SMEs since the 2010s has been much stronger than previously thought.
The Bank of Japan raised its policy rate by 0.25ppts to 0.75% at its meeting on Friday, which the dovish government had to accept in face of yen weakening pressures. Although we still project another hike to a terminal rate of 1% in mid-2026, the BoJ could find it more difficult to justify this if inflation eases towards 2% in H1 2026 and pressure on the yen fades.
We’ve changed our fiscal outlook for Japan in our December forecast round. We now expect the new government to set a primary deficit close to that of 2024, at 2%-3% of GDP for 2025-2027, instead of restoring a balanced budget by taking advantage of strong tax revenue. We assume higher bond yields will force the government to take measures to reduce the deficit from 2028.
EMDEs are projected to account for 70% of global CO₂ emissions by 2050, making accelerated emissions reductions in these economies essential. Yet gaps in AE leadership—such as US policy rollbacks and insufficient climate finance—risk slowing the global transition.
We modelled how advanced-economy leadership in innovation and finance could accelerate a global low-carbon transition.
The Bank of Japan (BoJ) kept its policy rate at 0.5% at its October meeting, after a 7-2 majority vote. Two board members again voted for a rate increase. We believe the BoJ will hike in December to 0.75% as incoming data confirm that the economy is performing in line with the bank’s forecasts in its quarterly outlook. However, there’s a material chance of a delay.
We’ve brought forward the timing of the next Bank of Japan (BoJ) 25bps rate hike to December from next year and have added another 25bps hike in mid-2026. This reflects the surprisingly hawkish shift in the BoJ’s view since its September policy meeting and upward revisions to our growth and inflation projections, driven by the US economy’s resilience.
At its monetary policy meeting on Friday, the Bank of Japan (BoJ) unexpectedly announced it would start to sell its ETF and Japanese real estate investment trust (J-REIT) holdings. We think the impact of this plan on financial markets will likely be limited because the BoJ is opting to play it safe in terms of the process and the scale.
Research Briefing High uncertainty means a cautious the Bank of Japan
Software investment in Japan has risen sharply since the late 2010s, outpacing investment overall. We expect this high rate of growth to continue as the economy undergoes a digital transformation and the acute shortage of labour continues, driven by adverse demographics.
Japan, the world’s third-largest advertising market, is seeing a rapidly maturing online advertising sector, while traditional channels still account for roughly half of total ad spend. This presents significant opportunity for digital growth, and promises important benefits for small and medium-sized businesses and the broader Japanese economy.
We believe the huge increase in foreign workers in Japan will prove unsustainable, despite the considerable labour shortages across various sectors, caused by unfavourable demographics. As shown by the far right’s progress at the recent election, Japan isn’t ready to drastically transform policy and society to accommodate large numbers of foreign workers as full citizens, rather than as ‘guest workers’.
The Bank of Japan kept its policy rate at 0.5% at its July meeting. We continue to think the BoJ will exercise caution on rate hikes despite still-high inflation and a recent trade deal with the US.
We estimate that the US’s effective tariff rate on Japanese products is around 17%, in line with our baseline assumption. Lower tariffs on autos are a positive, given the sector’s significant contribution to the economy and its broad domestic supporting base
The ruling Liberal Democratic party (LDP) and its partner Komeito lost their majority in Japan’s upper house elections on July 20. Although Prime Minister Shigeru Ishiba will likely stay to avoid political gridlock, especially to complete tariff negotiations with the US, the political situation has become fluid and could lead to a leadership change or the reshuffling of the coalition.
Amid the continued decline in working-age population, we expect Japan’s knowledge-intensive manufacturing sectors will likely outperform other sectors. Machinery, automotive, and chemicals all require specialised know-how that are not easily replicable, and these sectors are striving to boost labour productivity through various forms of investment. The machinery sector will perform particularly well, with its share of manufacturing rising more than 1 ppt by 2035.
Our scenario analysis reveals a partial shutdown of the Strait of Hormuz by Iran would push the Japanese economy into a near-stagflation situation in H2 2025, given Japan’s structural vulnerability to terms of trade shocks.
The Bank of Japan kept its policy rate at 0.5% and announced its exit plan from quantitative easing at Tuesday’s meeting. Following a recent spike in ultra-long JGB yields, the BoJ decided to ease off the pace of reducing JGB purchases in FY2026.
We expect Japan’s fiscal outlook to deteriorate due to weak economic growth and pressure on the government to implement fiscal stimulus. We don’t think deficit concerns drove the recent spike in ultra-long Japanese government bond (JGB) yields, but as domestic purchasers reduce their JGB holdings, long-term yields could become more sensitive to fiscal developments in the coming quarters, raising the risk of a higher term premium.
