1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 88
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
underlying inflation momentum. Services inflation remains supported by wage pass-through,
and inflation expectations appear better anchored than in past cycles. As subsidies unwind later
in 2026, inflation is likely to re-firm gradually.
Inflation has been above target for several years
5%
4%
3%
2%
1%
0%
-1%
-2%
2019
2020
Headline CPI YoY
2021
2022
2023
CPI YoY (ex. fresh food & energy)
2024
2% inflation
Source: Ministry of Internal Affairs and Communications, Bloomberg Finance LP, Scotia Wealth Management
Fiscal policy has turned more supportive as growth momentum cooled. The ¥21.3tn stimulus
package is front-loaded, with a significant share of spending flowing through 4Q25 and the first
half of 2026 via household relief and energy subsidies. These measures should reduce downside
risks to near-term growth. Beyond immediate support, the package includes multi-year
investment priorities aimed at boosting productivity and resilience, particularly in strategic areas
such as AI, semiconductors, and automation. While the near-term macro impact is modest, these
initiatives reinforce a capex-led theme consistent with structural labour shortages and improving
business sentiment.
At the same time, fiscal sustainability has returned to the forefront. Even with improved tax
receipts from higher nominal GDP, the scale of support implies increased JGB issuance over
coming years. Long-dated yields have risen, reflecting both supply concerns and the gradual
withdrawal of monetary accommodation. Minority-government dynamics and opposition
pressure for additional tax cuts and spending raise the probability of further supplemental
budgets in 2026, keeping term premia elevated, particularly at the long end of the curve. The
legacy of Abe-style economic policy is also influential within Japan’s leadership, suggesting scope
for additional fiscal initiatives ahead.
87
