Most people who have visited Tokyo in recent years share a common feeling: Japan has become less expensive. Whether it's sushi, cute trinkets, or electronics, the prices seem quite reasonable when converted to New Taiwan Dollars. For foreign tourists, this is a “discount” brought about by the yen's depreciation; but for the Japanese, it actually reflects a deeper structural shift—Japan is gradually moving out of a prolonged period of deflation spanning three decades.
Since the bursting of the asset bubble in the 1990s, the Japanese economy has long been stuck in a “three lows” pattern of “low growth, low inflation, and low interest rates,” and its global influence has gradually waned. This era has come to be known as Japan's “Lost Three Decades.” However, in recent years, Japan's economic structure has been quietly shifting—prices have begun to rise, interest rates have moved out of negative territory, and corporate investment is gradually increasing.
This does not suggest a resurgence of high growth, but rather a gradual transition toward a new economic paradigm.
Growth is slow, but the structure is shifting
According to forecasts from international organizations, Japan's economy will continue to expand moderately over the next two years. The IMF projects Japan's economic growth rate at approximately 0.7% for 2026 and 0.6% for 2027; the OECD is slightly more optimistic, forecasting growth of around 0.9% for both years. While this pace of growth is not particularly remarkable among major economies, it can be viewed as a tentative “normalization” compared to the near-zero growth stagnation of the past.
More importantly, the drivers of Japan's economic growth are shifting. In the past, Japan relied heavily on exports, but in the coming years, external demand (excluding tourism) is unlikely to serve as the primary engine. Uncertainties surrounding U.S. tariff policies, the restructuring of global supply chains, and the slowdown in China's economic growth coupled with industrial competition from China all create additional headwinds for exports.
Consequently, the key to whether Japan's economy can sustain moderate growth lies in domestic demand. The corporate sector remains relatively resilient, with corporate profits staying at high levels and a backlog of equipment orders. Additionally, government subsidies for semiconductors, AI, and supply chain restructuring are helping to maintain steady corporate investment. In contrast, the household sector remains relatively fragile, with unstable real wage growth and an aging population leading to a decline in consumption propensity.
In other words, whether Japan's domestic demand can sustain its recovery depends largely on one factor: whether wage growth can outpace inflation, and in turn be transmitted into household purchasing power.
Inflation and Monetary Policy: Normalization, but at a Slow Pace
Japan's current inflation exhibits a pattern of overall cooling, yet core inflation remains stubbornly high. Imported inflation driven by rising energy and food prices is gradually subsiding, but core inflation—driven by service prices and wage costs—remains around 2%.
Structurally, Japan's inflation is in a transitional phase: first, imported inflation driven by energy and food, followed by a shift to endogenous inflation driven by rising wages. Only when this second phase is established can Japan be considered to have truly escaped from deflation.
In March 2024, the Bank of Japan ended its negative interest rate policy; the current short-term policy rate stands at 0.75%, though the BOJ remains quite cautious about further rate hikes. The market generally expects one or two modest rate hikes within the year, but overall interest rates will remain at low levels. Therefore, the BOJ's policy logic can be summarized as: the direction is set, but the pace is slow.
Sanae Takaichi: More Proactive Industrial and Fiscal Policies
On the policy front, the economic strategy of new Prime Minister Sanae Takaichi warrants attention. The Takaichi administration clearly places greater emphasis on economic security and strategic industries, including expanding defense and energy security spending, strengthening investment in key sectors such as semiconductors and AI, and promoting energy transition and nuclear energy policies.
This policy approach resembles a “strategic industrial policy” to some extent, which helps stimulate corporate investment but also implies that Japan's fiscal pressures will continue to rise. Currently, Japan's government debt has reached over 250% of GDP, the highest among major economies.
Yen Weakness: Four Key Factors
The yen's recent sustained weakness stems primarily from four factors. First is the interest rate differential. Even though the Bank of Japan has begun raising interest rates, a significant gap remains compared to the U.S., keeping the yen a key funding currency in global financial markets.
The second factor is capital outflow. Japanese life insurance companies and pension funds have long invested in overseas assets, driving a continuous outflow of capital to foreign markets.
Third is energy dependence. Japan's heavy reliance on imported energy means that rising oil prices often worsen terms of trade and put downward pressure on the yen.
Finally, there is carry trade. When global risk appetite increases, investors often borrow low-interest-rate yen to invest, further driving the yen lower.
Therefore, the most likely scenario for the yen going forward is that its decline may stabilize, but it is unlikely to return to the era of long-term appreciation seen in the past.
Conflict in the Middle East: A Major External Risk to the Japanese Economy
Recent clashes between the United States, Israel, and Iran have reignited tensions in the Middle East. For Japan, this is a highly sensitive issue, as approximately 90% of its crude oil imports come from the region.
If oil prices rise sharply, the Japanese economy could face three major shocks: rising import-driven inflation, deteriorating terms of trade, and increased pressure for the yen to depreciate.
From “Provider of Funds” to “Destination for Capital”
The key to Japan's future in the coming years lies not in whether it can return to high-speed growth, but in whether it can complete an institutional transformation—shifting from an economy characterized by deflation, zero interest rates, and capital outflows to a “normalized economy” marked by moderate inflation, positive interest rates, and capital reallocation.
For the past three decades, Japan has been the world's cheapest source of capital; over the next decade, Japan may not become a high-growth economy, but it could once again become a market where capital is willing to stay—or even return. TSMC's investment in its Kumamoto plant may be just the beginning of this trend.
Of course, risks remain. Pessimists worry that Japan may remain a low-growth, mature economy under the pressures of high debt, a weak currency, and an aging population. But as Yamaji Hiromi, President & CEO, Tokyo Stock Exchange of the Tokyo Stock Exchange, has told the Economist: “Recovering from a severe bubble burst takes a generation.”
Now, Japan may be entering the final stage of this long recovery.
*The author is Chief Economist of Taiwan Cooperative Financial Holding and Chairman of Taiwan Cooperative Securities Investment Trust.
