Japan's Economy Slows Down Amid Inflation Pressures

Japan's economy is facing a slowdown in growth, according to BNP Paribas strategists. They predict that Japan's Gross Domestic Product (GDP) will slow down to 0.8% in 2026 from 1.1% in 2025 due to higher inflation and energy costs. However, this decline will be partly offset by fiscal support and investment in artificial intelligence.

The Bank of Japan is expected to continue hiking interest rates every four to five months until it reaches a terminal rate of 2.50% by 2028. This gradual tightening has already led to the yen depreciating against the US dollar, with a predicted price target of 165 USD/JPY by Q4 2026.

Japan is also facing long-term interest rate pressure due to its high public debt and the pace of monetary adjustment. The country's 10- and 30-year yields are at historically high levels, contributing to this pressure.