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Investing.com-- Japan’s economy is set to extend its modest expansion into 2026, underpinned by resilient domestic demand and gradual monetary tightening, Bank of America analysts said in a year-ahead outlook.
Domestic consumption and steady corporate investment are expected to offset persistent weakness in exports, which remain constrained by U.S. tariff policies, analysts wrote.
BofA raised its real GDP growth forecast for calendar-year 2025 to 1.3% from 0.9%, and for 2026 to 0.7% from 0.5%, citing retroactive GDP revisions and the fiscal stance of Japan’s new administration.
The bank sees expansion supported by moderating inflation, firmer household income, and continued labour-driven investment needs as companies respond to structural worker shortages.
The biggest uncertainty for Japan’s outlook stems from fiscal policy under Prime Minister Sanae Takaichi, whose government has already approved a large supplementary budget and is expected to lean toward expansion, BofA analysts said.
Potential tax cuts and higher strategic spending could lift growth but also revive concerns around fiscal sustainability, they added.
Inflation is forecast to slow from 3% in 2025 to 1.9% in 2026 as negative base effects in food prices intensify and government measures such as energy subsidies and gasoline tax cuts curb price pressures.
Core inflation is then expected to stabilise around 2% from the second half of 2026 as import-price inflation and rising service costs re-accelerate.
The Bank of Japan is projected to resume rate hikes in January 2026, followed by moves roughly every six months, pushing the policy rate to 1.5% by end-2027, provided underlying inflation continues its gradual uptrend, BofA said.