• Key policy rate: 1% (July 2026) 
• Q2 2026 GDP growth rate: 0.7% 
• Manufacturing Purchasing Managers’ Index reading: 54.9 (August 2026) 
• Inflation rate: 1.9% (July 2026) 

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) steered the economy’s exit from negative interest rates with a rate hike in March 2024 to quell rising inflation. This was followed by further tightening moves to bring the key rate to a 30-year high as of August 2026.     

The BOJ’s rate hikes briefly boosted the local currency, which provided some lift to exports. However, expansionary fiscal policies introduced by new Prime Minister Sanae Takaichi has raised nervousness towards Japan’s fiscal position, which has sent the yen to a low of 163 per US dollar and bond yields soaring.

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 has raised import costs. As of 2023, Japan’s top exports are motor vehicles, machinery, and electronics while major import items are fuels 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, but has been lagging behind the US, China, South Korea, and Taiwan in terms of producing high-grade semiconductors. However, data from the Purchasing Managers’ Index over the past year suggest a recovery in factory output in Japan for most of 2026. 

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 248 per cent of GDP in end-2025 raises concerns, given plans for income tax cuts and new public investments.

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 4 September 2026