BNP Paribas sees Japan’s Gross Domestic Product (GDP) growth slowing to 0.5% in 2026 from 1.1% in 2025 as the energy shock weighs on activity. Inflation is expected to stay above the 2% target through at least 2028. The Bank of Japan (BoJ) is projected to continue its gradual normalisation, with a 25 bp hike in Q2 2026 and a terminal rate of 2.0% by end-2027, while USD/JPY stabilises around 160.

Energy shock but steady policy normalisation

"The energy shock is set to impact the strong momentum of the Japanese economy negatively."

"We expect annual GDP growth to stand at 0.5% in 2026, down from 1.1% in 2025."

"Inflation has generally overshot the 2% y/y target since 2022 and is expected to stay there through at least 2028."

"Accordingly, the Bank of Japan initiated a process of “adjustment in the degree of monetary accommodation” in 2024, lifting the policy rate to 0.75% so far (previously negative)."

"We expect the process to extend, including one hike (25pb) in Q2 2026, until a 2.0% terminal rate in end-2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)