• Key policy rate: 0.75% (January 2026) 
• Q4 2025 GDP growth rate: 0.1%; full-year 2025: 1.1% 
• Manufacturing Purchasing Managers’ Index reading: 51.5 (January 2026) 
• Inflation rate: 2.1% (December 2025) 

Japan slid to being the world’s fourth-largest economy in 2023 as weak consumer spending persisted despite a long era of negative interest rates. Its rapidly aging population prefers saving over spending, and this has kept economic growth stagnant over the past decade. 

For eight years, banks and individual depositors in Japan were essentially penalized for keeping their cash in the bank, but this did little in terms of incentivising consumption and investments. The Bank of Japan (BOJ) maneuvered the economy’s exit from negative interest rates with a rate hike in March 2024 to quell rising inflation. This was followed by three more tightening moves to bring the key rate to a 30-year high as of December 2025.   

The BOJ’s rate hike briefly boosted the local currency after weakening to the 160 level against the US dollar, which provided some lift to exports. International trade accounts for a third of economic activity, although Japan has seen five straight years of a trade deficit, largely due to a weakening yen that raised import costs. As of 2023, Japan’s top exports are motor vehicles, semiconductors, and machinery, while major import items are fuels, natural gas, and medical products. 

Meanwhile, manufacturing accounts for nearly a fifth of Japan’s GDP, a share that has been gradually declining. Japan also leads the production of high-technology exports globally. However, data from the Purchasing Managers’ Index over the past year suggest a prolonged contraction in factory output in Japan. 

The International Monetary Fund has flagged that private spending and investments remain below pre-pandemic levels and thus stand in the way of unlocking faster growth for Japan’s economy. The country’s sky-high debt burden at above 230 per cent of GDP raises concerns, given plans by new Prime Minister Sanae Takaichi for expansionary fiscal policy through tax cuts and greater public spending.

House view: Japan is a mature economy grappling with an aging population, weak onshore demand, and heightened nervousness from foreign investors. However, it remains to be an important player in global manufacturing largely because of its contributions to technological advancements and innovation.

Higher interest rates set by the BOJ alongside greater fiscal prudence will support a recovery in investor sentiment despite long-standing domestic concerns.

Updated as of 17 February 2026