Following a year of sustained growth, Japan’s economy is navigating a transitional phase. While economists predict a strengthening economy, Japan is faced with potential interest rate hikes, a shifting political landscape under Prime Minister Sanae Takaichi and slight pressure from U.S. tariffs.  

In the fourth quarter of 2025, Japan’s real gross domestic product (GDP) expanded after a momentary lapse in July-September, reaching an annual average of 1.6%, per Reuters. This expansion can be attributed to robust corporate investment and resilient consumption.  

In December, the Bank of Japan (BOJ) raised interest rates to 0.75% from 0.5%, citing a weakened currency and persistent inflation. However, the central bank projects that Japan’s economy will moderate for the remainder of 2026. In January, it kept interest rates steady and revised its core consumer inflation forecast for fiscal 2026 to 1.9% from 1.8% three months earlier, according to Reuters. 

“As prices and wages rise gradually, we are at a phase where we need to scrutinize whether this will continue and if so, at what pace, looking at various data in making our rate decision,” said Kazuo Ueda, BOJ Governor, per Reuters. 

Tariff-induced pressures continue to weigh on Japan’s economy. In September, the Trump Administration issued Executive Order (E.O.) 14345, and regulations that implement certain provisions of the U.S.-Japan agreement announced in July 2025. In accordance with Japan’s $550 billion pledge, a U.S.-Japan memorandum of understanding (MOU) mandates that investments be made in targeted strategic sectors, such as semiconductors, pharmaceuticals, metals critical minerals, shipbuilding, energy, artificial intelligence and quantum computing before January 2029, per the Congressional Research Service. 

Last month, the newly-elected Japanese Prime Minister, Sanae Takaichi, made a promise to implement a proactive fiscal policy, which sent government bond yields to record highs last month. Additionally, she proposed halting the 8% consumption tax on food and drinks for a period of two years, “which precipitated a jump in government bond yields and a decline in the yen on market fears it could require funding through more debt issuance,” reads a Reuters article. 

In January, Japanese customers paid an average six days beyond terms, according to FCIB’s Credit and Collections Survey. The primary reasons for payment delays were billing disputes (62%) and customer payment policy (50%).  

“Japan’s business culture is built on trust, long-term relationships and respect,” one survey respondent wrote. “Maintain a respectful, calm tone in all communication.” 

“Make sure that you have a local consulting firm providing you with sound advice to structure your business correctly including observing taxation rules,” wrote another survey respondent.