Bank of Japan’s recent review highlights a moderate recovery in Japan’s economy, fueled by corporate profits and steady household income gains, despite ongoing uncertainties in global trade policies.

Abroad, global economic growth is expected to remain stable around 3-3.5%, with cautious optimism on business sentiment. Domestically, corporate profits have reached levels not seen since the mid-1980s, driven by cost pass-through and a weaker yen. Business investment continues to grow moderately, especially in digital and labor-saving sectors, while exports show regional variation, with strong demand from the U.S. and parts of Asia contrasting with weakness in Europe and China. Household consumption has steadily increased despite price rises, supported by wage growth and improving employment conditions. Inflation remains elevated, with consumer prices rising around 3%, reflecting broader cost increases and sustained price adjustments by firms.

The central bank projects continued economic expansion slightly above potential, accompanied by inflation gradually stabilizing around its 2% target by fiscal 2026. However, risks are notable, particularly from uncertain U.S. tariff policies, potential shifts in wage and price behavior, and fluctuating consumer sentiment. In response, the Bank of Japan raised its policy interest rate to 0.5% in early 2025 to moderate accommodation, with further adjustments contingent on economic developments. This careful balancing act underscores Japan’s effort to sustain growth while keeping inflation in check amid global and domestic challenges.