Bank of Japan forecasts moderate growth, inflation approaching 2 percent target
The Bank of Japan projects Japan's economy will continue to grow moderately, with underlying consumer price index inflation gradually increasing towards its 2 percent price stability target by the second half of the projection period. The January 2026 Outlook for Economic Activity and Prices highlights the role of overseas economies and a virtuous cycle from income to spending.
Virtuous cycle drives economic expansion
Japan's economy is expected to maintain moderate growth, driven by recovering overseas economies and an intensifying virtuous cycle between income and spending.
Government economic measures and accommodative financial conditions provide additional support.
In the corporate sector, exports and industrial production are projected to recover moderately, partly fueled by global AI-related demand, even with some impact from tariff increases.
Corporate profits are anticipated to remain at high levels, with business fixed investment continuing its increasing trend, focusing on labor-saving, digital, and R&D initiatives to address labor shortages.
The household sector will see further tightening labor market conditions, leading to steady wage increases in annual spring negotiations.
Private consumption, after a temporary flat period due to price rises, is set to gradually return to a moderate increasing trend, supported by rising employee income and government measures.
Inflation path towards 2 percent target
The year-on-year CPI increase (all items less fresh food) is expected to decelerate below 2 percent in the first half of this year, influenced by waning food price effects and government measures.
Despite this, the Bank anticipates a sustained mechanism of moderate wage and price interaction, ensuring underlying CPI inflation continues to rise moderately.
As the economy improves and labor shortages intensify, inflation expectations are projected to increase, gradually pushing both underlying and headline CPI inflation towards the 2 percent price stability target in the second half of the projection period.
Risks to this outlook include overseas economic and price developments, firms' wage- and price-setting behavior, and financial and foreign exchange market movements.
Risks to both economic activity and prices are generally balanced.
Steady course, familiar challenges
This outlook reinforces the Bank of Japan's consistent narrative regarding its inflation target.
While acknowledging near-term deceleration, the report firmly anchors expectations for a sustained return to 2 percent.
The emphasis on labor market tightening and rising inflation expectations provides a clear framework for future policy considerations.