Japan's Management of External Economic Factors
Japan enters Q4 2025 in a mixed but fragile economic position, with momentum slowing after an annualized 1.8 percent contraction in Q3 as reported by the Financial Times. Soft global demand, especially from China and Europe, has weakened Japan’s export engine, while a volatile yen has complicated planning for both manufacturers and consumers. Inflation remains above the Bank of Japan’s 2 percent target, driven by higher energy and food prices, but wage growth has not kept pace, limiting domestic consumption. (Source: Financial Times)
The government continues to walk a narrow line between managing inflation and supporting growth, a trend noted by both The Economist and Deloitte in their recent outlooks. Business investment has cooled due to rising borrowing costs and uncertainty around future rate adjustments, although the corporate sector remains well capitalized. Structural demographic challenges persist, particularly labor shortages and an aging population, adding long-term pressure to productivity and public spending. (Source: The Economist, Deloitte Insights)
Looking ahead to the remainder of Q4 2025, the International Monetary Fund expects Japan’s full-year growth to come in near 1.1 percent, with risks tilted to the downside if global trade conditions worsen. Capital markets remain sensitive to any shifts by the Bank of Japan, which is considering gradual rate increases but must weigh the possibility of triggering an abrupt yen spike. Investors are watching Japan’s economic trajectory closely as the balance between inflation control, export performance, and domestic stability remains uncertain. (Source: IMF, Reuters)
