On 17 February 2026 the IMF issued a report following consultations with Japan under Article IV of the IMF’s articles of agreement.
The report notes that Japan’s economic growth has been resilient following the global economic shocks, but this growth began to moderate in the second half of 2025. Domestic demand is still sustained by strong business investment and consumption. Economic activity is expected to continue to be firm in 2026, but to moderate due to weaker external demand. Private consumption will be supported by a gradual rise in real wages, due to decreasing inflation and continuing labour shortages. Downside risks to the outlook include further geo-economic fragmentation and rising trade restrictions which could disrupt supply chains and affect business sentiment. The main domestic risk is weaker consumption if real wage growth does not move into positive territory.
Following the pandemic, Japan has supported fiscal consolidation with firm revenue performance and spending restraint. Revenue has been boosted by strong tax collections and corporate profitability. Economic growth that exceeds the effective interest rate will help to reduce the public debt-to-GDP ratio, although gross debt will remain high.
The IMF considers that the government should avoid reducing the consumption tax, as this would be an untargeted measure eroding fiscal space and adding to fiscal risks. The support for vulnerable households and firms should be budget neutral, temporary, and targeted. If the government limits the consumption tax cut to essential goods, and introduces it as a temporary measure, this will help to reduce the cost of the measures. As public resources are limited, better targeted support to vulnerable households could be given through a system of refundable tax credits, if it is well-designed.
Over the long term, health and long-term care spending is projected to rise, as a result of rising long-term care costs, and demographic pressures from the aging population. High debt levels could leave the economy exposed to a range of shocks. The IMF report recommends growth-friendly fiscal adjustments beginning from 2026. Expenditure rationalization can improve efficiency and sustain investment in human and physical capital. Poorly targeted subsidies, including energy subsidies, must be eliminated.
In the past three decades the gap between productivity and wages has widened significantly. Stabilizing this situation requires labour market reforms to increase worker mobility, as this can increase the competition among firms for skills; and strengthen worker bargaining power. Merit-based pay can help to boost mobility and improve productivity.
Economic growth could be supported by removing policy distortions that limit the labour supply. The exemption from social security contributions can result in female workers limiting their working hours to remain eligible for the exemption. Expansion of health and pension contributions to individuals working 20 hours a week may have limited the number of part-time hours worked, as an unintended consequence of the measure. Effective mobility of workers could be supported by subsidized training programs to reskill the workforce.
