OECD Economic Surveys: Japan 2026

Executive summary

Key messages

Japan's economy has remained resilient in the face of several shocks in recent years and is projected to grow at a moderate pace, supported by domestic demand, despite strong external headwinds. As Japan shifts towards a new equilibrium in terms of higher prices and wages, macroeconomic policies should be calibrated carefully. Policies need to balance keeping inflation around the 2% target, ensuring fiscal sustainability and boosting potential growth notwithstanding an ageing population.

• With headline consumer price inflation projected to converge towards the 2% target and robust nominal wage growth, monetary policy normalisation should continue at a gradual pace. In a context of increasing debt servicing costs, putting public debt on a downward trajectory should be prioritised. Ensuring medium-term fiscal sustainability requires addressing ageing-related spending pressures, increasing tax revenues and limiting the use of supplementary budgets.

• Increasing female labour force participation rates and job quality, making more use of foreign workers, boosting the flexibility of labour markets and improving the relevance and quality of adult learning policies can help lower gender wage gaps, address labour shortages and counter adverse demographics.

• Ensuring the additionality of financial support provided for the Green Transformation (GX) investment, improving the governance of climate policies, streamlining permitting procedures and enhancing the electricity grid are crucial to achieving a climate-resilient net-zero economy.

• Boosting business dynamism, increasing innovation spillovers, attracting foreign capital and getting the most of digitalisation are key to raising productivity growth.

Growth is set to remain resilient amid high uncertainty

Despite the rise in near-term headwinds from higher uncertainty and energy prices, economic growth is set to moderate but remain robust in 2026-27. Downside risks are elevated. With headline consumer price inflation projected to converge towards the 2% target and robust nominal wage growth, monetary policy normalisation should continue at a gradual pace.

After three decades of near-zero inflation, there are signs that the Japanese economy is transitioning to a new equilibrium of price, growth and income dynamics. Headline consumer price inflation has been above the 2% target between April 2022 and December 2025 (Figure 1). Temporary factors, such as energy subsidies, and base effects have lowered headline inflation in early 2026. However, price pressures will increase in the near-term due to higher energy prices. Labour shortages arising from an ageing population and high corporate profits have pushed up both nominal wages, which experienced the strongest growth since the 1990s, and private investment.

After growing robustly at 1.2% in 2025, real GDP is projected to moderate but grow above potential in 2026-27 (Table 1). Domestic demand will be the main driver of growth. Private consumption will be supported by wage gains pushing up real disposable incomes. Robust corporate profits and the fiscal stimulus package will support business investment. Downside risks due to elevated energy prices, rising geopolitical tensions and trade fragmentation remain high.

Inflation is projected to converge towards target in 2026-27, as the impact of temporary factors and high energy prices ease. Monetary policy normalisation since March 2024, including increases in the short-term policy interest rate and decreases in the purchase of Japanese government bonds, has been gradual. While uncertainty from external headwinds warrants a cautious approach, the interest rates should continue to be raised, given higher inflation expectations, solid nominal wage growth and a closed output gap.

The financial system seems resilient, but risks should be monitored closely. Most notably, the rising interconnectedness of non-bank financial intermediaries and the financial system raises the risks of potential spillovers.

Figure 1. Temporary factors have recently pushed headline inflation down

Source: Ministry of Internal Affairs and Communications.

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Table 1. Domestic demand will be the main driver of growth

Annual growth rates, %, unless specified

	2024	2025	2026	2027
Real GDP	- 0.2	1.2	0.7	0.9
Total domestic demand	- 0.2	1.5	1.0	0.9
Unemployment rate	2.5	2.5	2.7	2.7
Headline consumer price inflation	2.7	3.2	2.0	1.9
General government financial balance (% of GDP)	- 1.7	-1.0	-1.8	-1.1
Gross public debt (% of GDP)	205.6	197.4	194.2	189.7

Source: OECD, Economic Outlook database.

Ensuring medium-term fiscal sustainability

In a context of increasing debt servicing costs, putting public debt on a downward trajectory should be prioritised. Building fiscal buffers and preparing for medium- to long-term spending pressures require addressing ageing-related costs, raising tax revenues and limiting the use of supplementary budgets.

Japan faces significant medium-term fiscal sustainability challenges. The gross public debt is the highest in the OECD, at around 206% of GDP in 2024. The number of elderly as a share of the working population is set to be 79% in 2060. Ageing and debt servicing costs are projected to rise by 2050. Additional spending commitments for the green and digital transformation, defence and economic security add to the need to build fiscal buffers. A combination of fiscal consolidation and structural reforms boosting productivity growth and labour supply will be needed to put public debt on a downward path. The starting point should be to establish a credible medium-term fiscal consolidation strategy, including measures to raise tax revenues and curb spending.

Containing spending growth requires pension, health and long-term care reforms. The automatic adjustment of pension benefits (macroeconomic indexation) aims to ensure the fiscal sustainability of the pension system. However, the system will be reviewed in case of a large fall in pension benefits. As a higher pension eligibility age would increase replacement rates, an automatic link between the retirement age and life expectancy should be adopted. Boosting out-of-pocket payments for the more affluent elderly through means-testing, and continuing to shift away from a hospital-based healthcare system would improve fiscal sustainability.

Japan should rely primarily on the consumption (value-added) tax to boost revenues. The current 10% rate is among the lowest in the OECD. In addition, various deductions to personal income taxes erode the tax base. Tax reforms should be accompanied by targeted support measures for low-income households.

Strengthening the rule-based fiscal framework would help achieve fiscal consolidation targets, and enhance transparency and accountability. This is becoming more important as the investor base must broaden, and long-term rates have been rising. The size of the supplementary budgets declined from their pandemic peaks, but they remain large (Figure 2), making budget ceilings non-binding and lowering the consistency of annual budgets and medium-term fiscal sustainability. Their use should be limited to large shocks with a more concrete definition under which circumstances they can be used.

Figure 2. The use of supplementary budgets should be limited

National general account budget

Note: Horizontal axis shows fiscal years.

Source: Ministry of Finance.

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Boosting labour supply to counter adverse demographics and tackle labour shortages

Demographic projections based on unchanged policy assumptions imply significant declines in employment rates. Extending working lives, and strengthening the quality, targeting and relevance of adult learning policies will be crucial. Continuing to ease labour market access for migrants and women would boost employment. Raising employment and productivity will also require having flexible labour markets and lowering the share of non-regular contracts.

Past labour market reforms have raised the employment of female and older workers, but their share in non-regular employment remains high. The associated lower wages and job quality weaken female labour force participation and contribute to the gender wage gap. Older workers are frequently re-employed as non-regular workers after mandatory retirement. For women, care responsibilities act as a major barrier to remaining in or returning to work, highlighting the importance of access to childcare. Continuing Work Style reforms, including equal pay for equal work, and breaking down labour-market dualism, by relaxing employment protection for regular workers and making it more transparent, are essential.

Policies to attract and integrate foreign workers should be continued. The number of foreign workers has risen to record highs, but remains low in international perspective. The recent reforms establishing new pathways for migrants are welcome, but there is a need to improve awareness abroad for applicants and guide them through the complexity of different schemes. The implementation of integration policies at the local level requires boosting expertise and resources.

Adult learning policies should be adapted to changing skill needs and an ageing population. Historically, on-the-job training has been more common than participation in formal adult learning, given lifetime employment practices. As labour shortages are increasing the need for labour mobility, the relevance and quality of adult learning programmes should be improved. The information on different training opportunities is scattered, which may lower their accessibility. Female, older and non-regular workers are significantly less likely to participate in adult learning (Figure 3), underscoring the need for more targeted outreach, concentrating on in-demand skills, especially digital ones.

Figure 3. Participation gaps in adult learning are high

Participation in adult learning, 2023

Source: OECD (2025), Trends in Adult Learning: New Data from the 2023 Survey of Adult Skills.

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Decarbonising the economy

Accelerated action is needed to meet the net-zero emissions target by 2050. Policies need to be well-designed to ensure they do not exacerbate fiscal sustainability challenges. Improving the governance of climate policies, boosting the efficiency of permitting procedures, raising carbon taxation and ensuring additionality of public support to Green Transformation (GX) investment are crucial.

Despite good progress in decoupling emissions and growth since their peak in 2013, Japan’s energy and electricity mix remains heavily dependent on fossil fuels. The latest outlook includes an increase in the share of nuclear and renewables in electricity production to around 20% and around 40-50%, respectively, by FY2040, which may face implementation challenges. Improving climate governance, for example by establishing an independent climate advisory body, can help enhance the legitimacy of the policymaking process and strengthen public support for climate action.

The design of policies will be crucial to ensure that GX2040 vision delivers effective outcomes at value for money. The strategy includes plans to introduce carbon pricing later in the decade in exchange for upfront industrial subsidies for investment. A competitive and transparent selection process for firms and technologies is essential to ensure additionality of the financial support. Announcing swiftly the details of the forthcoming carbon pricing, which should be high enough to create incentives for emission reductions, would boost investment certainty and raise tax revenues.

Lengthy permitting processes and limited grid capacity are holding back the efficient use of renewable energy sources as well as the expansion of renewable production capacity. There is room to streamline the permitting processes, for example by centralising procedures that span multiple administrative agencies. It will be important to maintain their effectiveness in identifying potential environmental impacts. This should be complemented by boosting grid capacity, based on cost-benefit analysis, given rising demand for electricity.

Adaptive measures to address climate risks should also be continued. This requires capacity building at the local level and coordination across different stakeholders.

Raising productivity growth

Boosting productivity growth is key to ensuring high living standards and fiscal sustainability. This requires strengthening competition and making public support to small and medium-sized enterprises more effective to increase business dynamism, encouraging foreign direct investment to unlock productivity spillovers and reforming the innovation framework and incentives for start-ups.

The level of hourly labour productivity is low (Figure 4). The marked slowdown in capital deepening since 2000 and historically low multi-factor productivity growth have constrained productivity growth. Business dynamism, which spurs productivity gains by encouraging firm entry and subsequent growth and the exit of less productive firms, is weak in international perspective.

The administrative proceedings for registering and starting a business are complex and can be lengthy. Digital public infrastructure is improving, but digital integration across government services is needed to enable the full implementation of the ‘once-only’ principle. This would ensure that businesses do not have to resubmit information already shared with other authorities. Adopting a ‘silence is consent’ principle can improve firms’ ability to plan ahead by limiting the time to complete licensing procedures.

Japan aims to increase its stock of inward foreign direct investment (FDI), the lowest in the OECD at around 5% of GDP. Formal regulations on inward FDI are not too restrictive, but integration into local business ecosystems can be challenging. Japan has one-stop shops helping foreign investors navigate the regulatory system. However, they face limitations in their ability to liaise with other registering and licensing authorities. Strengthening their coordination role would further streamline administrative burdens for foreign investors.

The share of graduates in science, technology, engineering, or mathematics (STEM) fields is below the OECD average, and is the lowest in the OECD for women at 3.6%. The underrepresentation of women in STEM education and career pathways partly reflects stereotypes. The various initiatives to raise awareness and interest in STEM careers should be stepped up, including through effective mentoring of female students in upper secondary and in early university years.

Figure 4. Labour productivity lags the OECD average

GDP per hour worked, 2024 or latest available

Note: OECD and EA (euro area) refer to a weighted average.

Source: OECD, Productivity Statistics database.

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Public financial support for SMEs has receded from its pandemic peak but remains well above pre-COVID levels, potentially weighing on the efficient allocation of resources. Generous guarantees by Credit Guarantee Corporations, which cover the credit risk of private banks and are re-insured by the publicly-owned Japan Finance Corporation, lower banks’ risk exposure and may weaken credit screening. Enhancing risk-sharing between banks and public guarantees, for example via lower guarantee coverage rates, would help strengthen banks’ risk assessment.

The small size of the venture capital (VC) market could weigh on business entry and scale-up, including in the field of artificial intelligence. Limited domestic late-stage VC often pushes innovative firms to go public before achieving sufficient scale. Strengthening public venture capital initiatives, complemented with mezzanine finance options, can support the growth of innovative firms before listing on public markets. A more streamlined R&D tax system would enhance their take-up by innovative start-ups, enabling their scaling up.

 

MAIN FINDINGS	KEY RECOMMENDATIONS
Ensuring macroeconomic stability and sustainability
Monetary policy normalisation has commenced, and inflation is projected to converge towards the 2% target.	Gradually increase the policy rate, in a data-driven and flexible manner.
The rising interconnectedness of non-bank financial intermediaries (NBFIs) and the financial system raises the risks of potential spillovers.	Continue to closely monitor NBFIs, addressing remaining data gaps, with a view to revising the regulatory framework, if needed.
The recent improvements in the near-term fiscal situation reflect higher tax revenues amid high nominal growth. The latest supplementary budget is projected to reverse the gains towards a primary surplus target in 2026.	Limit the use of supplementary budgets to large economic shocks and evaluate them ex-post.
High gross public debt to GDP ratio, rising interest rates and population ageing create medium-term fiscal sustainability challenges.	Elaborate a clear and credible medium-term fiscal plan to achieve primary surpluses early on and then maintain them, underpinned by specific expenditure and tax measures, to put the government debt ratio on a downward trend.
Addressing ageing-related costs is crucial to improving medium-term fiscal sustainability.	Link the pension eligibility age to life expectancy to ensure the financial sustainability of the pension system. Further boost the co-payment rate of the elderly on health care by means-testing based on an effective method of assessing income and assets.
Tax revenues are close to the OECD average, but the share of consumption (value-added) taxes is low. Various deductions to personal income taxes erode the tax base.	Gradually raise tax revenues, including by increasing the consumption tax rate further in small increments.
Addressing labour shortages
Japan has significantly boosted the employment of female and older workers, but the share of female and older workers with non-regular jobs is high, reflecting care responsibilities and the practice of moving older workers to non-regular jobs after mandatory retirement.	Increase female labour market participation and job quality further by breaking down labour market dualism and boosting access to childcare. Relax employment protection for regular workers and make it more transparent to lower the share of non-regular workers.
The implementation of the national integration framework for migrants at the local level is lagging.	Provide further support and tools to boost the integration of migrants, especially in rural and local areas with less expertise and resources.
Female, older and non-regular workers are less likely to engage in adult learning.	Provide targeted training for vulnerable workers, including modular courses linked to in-demand skills, especially digital ones.
Decarbonising the economy
There is a need to accelerate implementation to meet the target of net-zero emissions by 2050.	Further enhance the governance and transparency of climate policies, for example through establishing an independent advisory climate body.
The Green Transformation (GX) 2040 Vision includes upfront investment support of JPY 20 trillion.	Ensure additionality of the financial support provided under the GX Strategy through a competitive and transparent selection process and regular reviews.
The details on the forthcoming GX-surcharge and mandatory emissions scheme (ETS) are still lacking, leading to investment uncertainty.	Establish swiftly the total number of allowances, the GX-surcharge rate and their future tightening trajectories and consider enshrining them in legislation.
Expansion of renewable energy capacity is held back by lengthy permitting processes and limited grid capacity.	Further streamline the environmental impact assessment and permitting procedures for renewable wind energy infrastructure, while ensuring their effectiveness.
Boosting productivity growth
Limited digital integration across government services constrains the commitment to the ‘once-only’ principle, forcing businesses to submit information already shared. The lack of time limits for completing licensing and permitting procedures reduces firms’ ability to plan ahead.	Ensure seamless digital integration of government services, for example for business registration and licensing, and adopt a ‘silence is consent’ principle, where appropriate.
Inward FDI one-stop shops face limitations in their ability to liaise directly with other registration, licensing, and compliance authorities.	Empower the inward FDI one-stop shops to serve as more active interfaces with registration, licensing and compliance authorities to reduce the administrative burdens on foreign investors.
The share of graduates in science, technology, engineering, or mathematics (STEM) is low, particularly for women.	Promote greater participation in STEM disciplines, notably via targeted mentoring initiatives for female students.
Broad-based public guarantees and subsidised loans, which remain high, may help non-viable firms remain afloat, delaying restructuring.	Enhance risk-sharing between banks and the public sector, for example by further lowering the coverage rate of public loan guarantees.
The limited availability of growth financing pushes innovative artificial intelligence (AI) and deep tech start-ups to go public prematurely.	Strengthen public venture capital initiatives, alongside mezzanine finance options, to help innovative AI start-ups scale before listing.