Japan: Staff Concluding Statement of the 2026 Article IV Mission

IMF News, February 17, 2026

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Published: February 17, 2026

Overview

The Japanese economy has displayed impressive resilience in the face of global shocks and is experiencing a sustained period of output growing above potential.
Domestic demand has been robust and unemployment remains low.
After three decades of near-zero inflation, prices have been growing faster than the BOJ’s 2-percent target for three and a half years.
Nominal wages are rising at a historic pace, but high inflation has eroded household purchasing power and real wages have continued to contract.
Japan faces structural challenges from an aging population and high public debt.
With a positive output gap and inflation expected to converge to target from above, fiscal and monetary policies should be calibrated to sustain price and output stability while rebuilding fiscal buffers.
Labor market reforms are needed to ensure labor market tightness translates into sustained real wage gains.

Recent developments, outlook, and risks

Growth and inflation
- Growth recovered to exceed potential in the first half of 2025, but has started to moderate.
- Domestic demand remained firm in 2025 despite elevated uncertainty and introduction of U.S. tariffs; business investment and consumption were strong.
- Inflation was stronger than expected in 2025, boosted by soaring rice prices; inflationary pressures broadened across products.
- Services inflation has been more moderate; yen depreciation had a limited impact on headline inflation, with import prices declining on average in 2025.
- Medium-term inflation expectations have been rising and are gradually realigning with the BOJ’s target.
- Labor market tightness supports higher nominal wage growth, but real wages continued to contract as headline price increases outpace wage gains.
Projections
- Economic activity is projected to remain strong in 2026 but to moderate due to weaker external demand.
- Private investment is expected to strengthen further despite gradual tightening of financial conditions.
- Private consumption will be supported by a gradual rise in real wages as inflation eases and labor shortages persist.
- Staff assume the fiscal stance will turn expansionary in 2026 based on past practice on supplementary budgets.
- Above-potential growth in 2025-26 leads to a positive output gap projected to close by end-2027 as monetary and fiscal policies become neutral.
- Inflation is expected to moderate in 2026 and converge toward the BOJ’s target in 2027; core inflation is expected to remain more persistent partly due to a more accommodative fiscal policy stance.
External and financial conditions
- The current account surplus is projected to remain strong in 2026, driven primarily by an income balance surplus from Japan’s large stock of net foreign assets.
- The surplus is expected to moderate over the medium term as the rate of return on external assets normalizes.
- Staff project Japan’s commitment to invest $550 billion in the U.S. economy to boost outward investment and bilateral trade.
- Financial conditions are broadly neutral: still-ample liquidity, compressed credit spreads, and favorable market functioning.
- Equity prices rose sharply in 2025; sovereign bond yields climbed rapidly driven by higher expected policy rates and term premia.
- The yen-dollar exchange rate tracked the US-Japan yield differential historically but has decoupled since mid-2025; yen futures positions have been associated with unexplained yen movements.
Risks
- Downside risks to the outlook are prominent: geoeconomic fragmentation, rising trade restrictions, abrupt deterioration of financial conditions, and weak consumption if real wage growth fails to turn positive.
- Inflation risks are balanced: weaker-than-expected wage growth could lower inflation momentum; more expansionary fiscal policy could boost demand pressures and core inflation; recurrent forecast errors imply inflation persistence risk.

Economic policies

Monetary and exchange rate policies
- The BOJ is appropriately withdrawing monetary accommodation; gradual hikes should continue to move the policy rate toward neutral.
- The current policy rate remains below staff’s estimate for the neutral rate (neutral rate subject to significant uncertainty).
- Staff welcome recent BOJ decisions, including pausing rate hikes and resuming in December as evidence grew inflation will stabilize at target.
- Withdrawal of policy accommodation should continue so the policy rate reaches a neutral stance in 2027.
- A gradual pace of normalization remains appropriate to support re-anchoring of inflation expectations at target.
- BOJ independence and credibility are important to keep expectations anchored; a flexible, data-dependent approach is appropriate.
- BOJ balance sheet reduction is progressing smoothly; pace strikes an appropriate balance between market functioning and disruption risks.
- BOJ should be ready to modify the pace and maturity profile of outright purchases if financial conditions become inconsistent with desired stance and should articulate the approach for long-run size and composition of its balance sheet.
- The authorities’ commitment to a flexible exchange rate regime is welcome; exchange rate flexibility should absorb shocks and support price stability.

Fiscal policy
- Post-pandemic fiscal consolidation was underpinned by strong revenue performance and spending restraint.
- The primary deficit of general government for 2025 is estimated to have been smaller than it was in 2019 and among the smallest in the G7.
- Revenue strength supported by buoyant tax collections amid solid nominal wage gains and strong corporate profitability.
- December 2025 supplementary budget contained measures to address rising cost of living.
- Nominal growth exceeding the effective interest rate will help reduce the public debt-to-GDP ratio, but gross debt will remain elevated—the highest among major economies—and is expected to rise as spending pressures build.
- Near-term policy advice:
- Refrain from further loosening in the near term; adopt a more neutral fiscal stance while the economy operates above potential.
- Avoid reducing the consumption tax (an untargeted measure that would erode fiscal space).
- Support for vulnerable households and firms should be budget neutral, temporary, and targeted.
- Authorities are discussing a two-year suspension of the consumption tax on food and beverages with financing to prevent additional JGB issuance; limiting the cut to essential goods and ensuring temporariness would help contain fiscal costs.
- A system of refundable tax credits discussed for after the two-year suspension could provide better-targeted support if well-designed.
- Long-term fiscal outlook and recommendations:
- The primary deficit is projected to grow, spending pressures will increase, and interest payments are projected to rise, doubling from 2025 to 2031.
- Health and long-term care spending is projected to rise due to medical technology advances, long-term care costs, and demographic aging.
- Staff recommend growth-friendly fiscal adjustment starting in 2026 to offset spending pressures, rebuild fiscal buffers, and keep the debt-to-GDP ratio on a downward path.
- Expenditure rationalization should improve efficiency and preserve high-quality investments; eliminate poorly targeted subsidies, including energy subsidies.
- Establish a credible medium-term fiscal framework with a clearly defined fiscal anchor and strong link between annual budgets and medium-term planning.
- Restrict use of supplementary budgets to large, unexpected shocks; enhance fiscal frameworks at the subnational level; improve governance of state funds.

Financial stability
- Japan’s financial system remains broadly resilient with robust capital and liquidity across banking and insurance sectors.
- Gradual policy rate hikes have lifted net interest margins and supported profitability.
- Capital buffers remain solid for internationally active and domestic banks; major banks manage interest rate risks proactively.
- Insurance sector is well capitalized and profitable; higher domestic rates improve investment margins.
- Systemic risk sources have shifted since the 2025 Article IV but overall risk has not materially changed.
- Persisting vulnerabilities from the 2024 FSAP include sizeable mark-to-market securities, FX and cross-currency funding exposures, and pockets of commercial real estate vulnerability.
- Faster-than-expected yield rises could cause valuation losses and increase liquidity needs for insurers; regional banks are more vulnerable than major banks.
- Policy recommendations:
- Strengthen systemic risk monitoring, macroprudential framework, financial safety net, and oversight of the financial sector, following 2024 FSAP recommendations.
- Close data gaps on FX derivative positions and investment activities of leveraged foreign investors.
- Closely monitor JGB market liquidity and investor positioning amid increased yield volatility and shifting demand as BOJ reduces its balance sheet.
- BOJ should be prepared to make exceptional targeted interventions (e.g., temporary JGB purchases) if volatility undermines market liquidity; interventions should be clearly communicated.
- Maintain flexibility to rebalance JGB issuance toward shorter maturities if demand at the long end weakens.

Structural policies

Labor market and wages
- Real wage growth has been elusive despite rising labor shortages; since 1996 the gap between productivity and wages has widened substantially.
- Reforms needed: increase worker mobility, shift to job-based employment and merit-based pay to boost mobility, improve productivity, and support wage growth.
- Early evidence shows labor mobility has started to pick up, driven by younger workers.
- Remove policy distortions limiting labor supply (e.g., social security contribution exemptions that lead female workers to limit hours; expanding health and pension contributions to those working 20 hours a week may have limited part-time hours).
- Active labor market policies to support mobility and tackle AI-driven displacement: subsidized training programs to reskill and upskill the workforce.
Industrial policy
- Japan has stepped up industrial policies to promote semiconductors and the green transformation.
- Recommendations: time-bound IPs with clear sunset clauses; subject IPs to thorough cost-benefit analysis; keep IPs narrowly targeted to objectives with externalities or market failures.

Key statistics (selected)

Nominal GDP: US$ 4,190 Billion (2024)
GDP per capita: US$ 33,820 (2024)
Population: 124 Million (2024)
Quota: SDR 30.8 billion (2024)

Selected time-series (growth, inflation, fiscal and external indicators as reported)

Real GDP growth (percent change, period average)
- 2022: 1.3
- 2023: 0.7
- 2024: -0.2
- 2025: 1.1
- 2026 (Proj.): 0.8
- 2027 (Proj.): 0.6
Output Gap: 0.5
Headline CPI (percent change, period average)
- 2024: 2.5
- 2025: 3.3
- 2026 (Proj.): 2.7
- 2027 (Proj.): 3.2
Core CPI (ex. fresh food & energy) (percent change, period average)
- 2024: 3.9
- 2025: 2.4
Government (percent of GDP)
- Revenue (2024): 35.6
- Expenditure (2024): 37.3
- Overall Balance (2024): -1.6
- Primary balance (2024): -1.5
- Structural primary balance (2024): -2.1
- Public debt, gross (percent of GDP)
- 2022: 227.8
- 2023: 220.3
- 2024: 214.5
- 2025: 207.0
- 2026 (Proj.): 203.1
- 2027 (Proj.): 199.9
Balance of payments (in billions of USD)
- Current account balance
- 2022: 89.9
- 2023: 156.2
- 2024: 189.2
- 2025: 207.3
- 2026 (Proj.): 197.3
- 2027 (Proj.): 198.8
- Trade balance (in billions of USD)
- 2022: -115.8
- 2023: -49.0
- 2024: -24.5
- 2025: -9.7
- 2026 (Proj.): -20.2
- 2027 (Proj.): -23.4
- Exports of goods, f.o.b. (in billions of USD)
- 2022: 752.5
- 2023: 714.7
- 2024: 693.8
- 2025: 718.9
- 2026 (Proj.): 710.0
- 2027 (Proj.): 707.9
- Imports of goods, f.o.b. (in billions of USD)
- 2022: 868.3
- 2023: 763.7
- 2024: 718.4
- 2025: 728.6
- 2026 (Proj.): 730.2
- 2027 (Proj.): 731.3
- Energy imports (in billions of USD)
- 2022: 195.5
- 2023: 138.3
- 2024: 108.0
- 2025: 90.0
- 2026 (Proj.): 82.0
Exchange rates (period average)
- Yen/dollar rate
- 2022: 131.5
- 2023: 140.5
- 2024: 151.4
- 2025: 149.4
- Yen/euro rate
- 2022: 138.6
- 2023: 152.0
- 2024: 163.8
- 2025: 168.6
- Real effective exchange rate (ULC-based, 2010=100)
- 2022: 61.6
- 2023: 55.6
- 2024: 51.6
- Real effective exchange rate (CPI-based, 2010=100)
- 2022: 61.2
- 2023: 58.1
- 2024: 55.0

Final recommendations (summary)

Monetary: Continue gradual withdrawal of accommodation; reach neutral stance by 2027; maintain BOJ independence, credibility, and data-dependent flexibility; articulate long-run balance sheet strategy.
Fiscal: Refrain from further loosening in near term; pursue growth-friendly fiscal adjustment starting in 2026; avoid untargeted consumption tax cuts; target and time-limit support for vulnerable groups; strengthen medium-term fiscal framework and subnational fiscal governance.
Financial stability: Strengthen systemic risk monitoring, macroprudential framework, and data coverage on FX and leveraged investor activity; monitor JGB market liquidity and be prepared for targeted BOJ interventions if needed.
Structural: Implement labor market reforms to raise mobility and real wages; support reskilling/upskilling for AI-related transitions; use industrial policies sparingly, time-bound, narrowly targeted, and subject to cost-benefit analysis.

IMF staff concluding statement of the 2026 Article IV mission to Japan (mission conducted January 22–February 5, 2026).