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Investing.com-- Japan’s economy is entering a critical transition phase in 2026 as policymakers attempt to steer the country from decades of nominal stagnation toward a period of moderate but stable growth, UBS analysts said in a research note.
The bank expects a “virtuous cycle” of income, spending, wages, and prices to take hold despite lingering risks from global shocks and demographic pressures.
UBS economists forecast that headline inflation will slow sharply next year due to cooling food prices, though underlying price pressures will remain firm, supported by rising inflation expectations, a narrowing output gap and sustained wage growth.
Core-core CPI is projected to ease from 3.1% in 2025 to 2.1% in 2026 before stabilizing near 2% in 2027.
The analysts expect the Bank of Japan to proceed with policy normalization, lifting its policy rate from 0.5% to 0.75% in December, followed by semiannual 25-basis-point hikes to reach 1.25% by end-2026 and a terminal rate of 1.5% in mid-2027.
UBS warned, however, that quantitative tightening could stall if fiscal expansion strains the government bond market.
Fiscal policy under Prime Minister Sanae Takaichi is set to turn more expansionary, with measures aimed at boosting household purchasing power and corporate investment in strategic sectors. UBS estimates a 0.9-percentage-point fiscal easing in 2026, potentially lifting GDP by 0.2 points.
The bank’s baseline scenario calls for Japan’s real GDP growth to rise to 1.1% in 2026, outpacing consensus and the BoJ outlook.
Still, UBS flagged key risks, including a potential “Japan sell-off” if fiscal expansion overshoots, an AI-related global downturn, and persistent pessimism among households and small businesses.