TOKYO – Japan’s economy is likely to fall behind India’s in 2026 to fifth place in the world, according to an International Monetary Fund’s estimate, potentially diminishing the East Asian nation’s presence on the global stage.
The subdued economic outlook makes Prime Minister Sanae Takaichi’s planned growth strategy, due out in the summer, all the more important to combat the burden from the country’s shrinking population, economists say. They call for productivity improvements and further efforts to tap into promising growth fields.
Japan’s economy shrank for the first time in six quarters in the July-September period, due partly to weak exports amid higher U.S. tariffs imposed by President Donald Trump, according to government data.
Economists expect the Japanese economy to return to a moderate recovery path in 2026, with uncertainty over U.S. trade policy easing following a bilateral deal.
Corporate profits are expected to remain resilient, providing impetus for capital spending and sustained wage hikes — both key components of gross domestic product.
The Organization for Economic Cooperation and Development said that Japan’s economy is projected to grow 0.9 percent this year, helped by expansionary fiscal policy under Takaichi and private consumption growth supported by real disposable income gains.
But Yusuke Koshiyama, senior economist at Mizuho Research & Technologies, says the economy is facing two major risk factors — the yen’s depreciation and recent diplomatic rows with China.
The Japanese currency has been under selling pressure as concerns mount about Japan’s fiscal health due to Takaichi’s expansionary spending plans including funding for inflation relief measures for households.
Noting that a weaker yen could raise import costs and accelerate inflation, Koshiyama said, “There is no denying the risk of an intensifying stagflation phase — meaning high inflation amid low growth — if inflationary pressure from the yen’s depreciation offsets the effects of measures against rising prices.”
Bilateral ties between Japan and China have recently been strained over Takaichi’s remarks in November suggesting Tokyo could get involved in the event of an attack on Taiwan by Beijing, which considers the self-ruled island part of its territory.
With China urging its citizens to avoid visiting Japan, a potential drop in inbound tourism could dent Japan’s growth, weighing on corporate earnings and, eventually, affecting investment and wage hikes, Koshiyama said.
The IMF’s global outlook released in October showed that Japan is set to fall behind India in nominal gross domestic product on a U.S. dollar basis, two years after being overtaken by Germany.
Acknowledging that the projection largely stems from the yen’s weakness, Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, said a lower ranking “would directly lead to a decline in the Japan’s influence in global trade, the global economy and world politics.”
“The fundamental issue is that productivity has not risen, despite past administrations seeking to raise it through various growth strategies,” Kobayashi said.
Attention is on a new growth strategy the Takaichi administration plans to put together in the summer as the premier seeks to build a robust economy through public and private sector investments.
Under her slogan of “responsible and proactive public finances,” Takaichi has designated 17 strategic fields to be supported under the scheme, including shipbuilding, artificial intelligence and semiconductors.
Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute, said Takaichi’s plan overlooks several fields with strong growth potential, such as tourism, decarbonization, robotics and self-driving technologies.
“It would be desirable for the Takaichi administration to revise the contents gradually and flexibly,” Kumano added.
Takahide Kiuchi, executive economist at Nomura Research Institute, called on the Takaichi administration to address the declining birthrate as part of its growth strategy.
“Companies will become pessimistic about the potential growth of the Japanese market, where the decline in population is set to accelerate, and curb domestic investment, which will lower labor productivity,” Kiuchi said.
Aggressive fiscal spending involving more bond issuances like the upcoming stimulus package will reduce the funds available for future generations and eventually curb economic activity, lowering Japan’s potential growth, he warned.
“Demonstrating a commitment to medium- and long-term fiscal consolidation will stem declining growth expectations among domestic companies and prevent a further erosion of Japan’s economic presence, which will serve as one of the key growth strategies,” he added.
AloJapan.com