Following its completion of the fourth assessment under the 2025 agreement, the IMF noted that Japan’s economic growth has accelerated, with a potential growth rate of 0.5%. Private consumption has continued to recover, primarily due to wage growth outpacing inflation, which is expected to increase household disposable income and further encourage consumer spending. Meanwhile, benefiting from high corporate profits and a loose financial policy environment, private investment is expected to remain active. Additionally, the decline in commodity prices, such as oil and food, has eased input inflation pressures, and both overall and core inflation are expected to approach the Bank of Japan’s 2% target by the end of 2025.
Japan’s inflation situation is showing positive changes. The overall inflation rate is near the central bank’s 2% target, while core inflation continues to rise steadily. Notably, wage growth has reached its highest level since the 1990s, reflecting tight labor market conditions and providing momentum for domestic demand expansion. Improvements in income distribution will help alleviate downward pressures on consumption.
However, Japan’s economy still faces three major structural barriers. The first is the labor shortage exacerbated by an aging population, followed by the burden of government debt, which ranks among the highest in the world, and the ongoing external balance challenge due to a widening trade deficit. Although the current account surplus is stabilizing, the continued trade deficit presents uncertainty for Japan’s balance of payments.
In response to these challenges, the IMF recommends Japan adopt a series of policy adjustments. First, structural reforms should be implemented to boost potential growth, including labor market reforms to enhance economic resilience. Second, fiscal discipline should be strengthened to address debt risks and ensure medium-term fiscal sustainability. Furthermore, establishing a clear inflation target framework is essential to restore market confidence in inflation goals. The IMF also emphasized the importance of optimizing industrial structure and improving the business environment to stimulate the economy’s intrinsic growth potential.
Looking ahead, Japan’s economy is undergoing a crucial period of transformation. While short-term growth prospects are favorable, achieving sustainable development will require breakthroughs in multiple areas. Increasing labor participation, enhancing technological innovation, optimizing industrial layout, and improving the business environment are key to achieving high-quality economic development.
The IMF’s assessment provides important guidance for Japan’s economy. With the combined effects of active fiscal policies and sound monetary policies, Japan’s economy is expected to achieve higher-quality growth as it overcomes structural challenges.
