After decades of near-zero inflation, Japan's economy is starting to move towards a new, higher-inflation equilibrium. Reforms to ensure fiscal sustainability and boost productivity and labour supply need to be continued to address demographic and external headwinds, according to the OECD Economic Survey of Japan.
After growth of 1.2% in 2025, GDP growth is expected to ease to 0.7% in 2026 and 0.9% in 2027, in the context of the rise of energy prices and near-term uncertainty due to the conflict in the Middle East. Inflation is projected to be 2.0% in 2026 and 1.9% in 2027, at or near the central bank's target of 2%.
"Japan's economy has shown resilience in recent years, with output expanding at a moderate pace, driven by domestic demand," OECD Secretary-General Mathias Cormann said, presenting the Survey in Tokyo. "To manage the pressures of rising debt servicing costs and an ageing population, Japan should maintain reform momentum to reduce public debt and build fiscal buffers. Cutting administrative burdens would lift business productivity, while strengthening work incentives for older workers and women would boost labour supply."
Putting public debt on a firm downward trajectory should be a priority. Comprehensive reforms to contain spending growth linked to pensions, health and long-term care and optimise revenues by gradually increasing the value-added tax rate would help build fiscal buffers. Limiting the use of supplementary budgets is needed to strengthen the rules-based fiscal framework and improve fiscal prudence.
Streamlining administrative proceedings for firm entry and registration would increase business dynamism and spur productivity gains. Enhancing the role of one-stop shops to reduce procedural complexity, while boosting measures to ease language and other barriers, would help attract inward foreign direct investment. Better targeted support for small and medium-sized enterprises is required to encourage young and innovative firms to grow and unproductive firms to exit.
Labour market reforms need to be continued as the share of women and older workers in non-regular employment remains high. Boosting flexibility of regular employment contracts would help break down labour market dualism. Policies to attract and integrate foreign workers, as well as to guide them through employment schemes, would help better utilise foreign talents. Providing relevant and high-quality adult learning programmes targeted towards older workers and workers on non-standard contracts is necessary to engage them in quality employment.
Given Japan's heavy reliance on fossil fuels, efforts to reach net-zero emission goals and strengthen energy security need to accelerate. A swift announcement of the details of forthcoming carbon pricing would increase investment certainty and help the effective implementation of the Green Transformation (GX) 2040 Vision. Streamlining permitting processes by centralising procedures that span multiple administrative agencies can boost the use of renewable energy sources.
