Growth in Q4 was only +0.1% QoQ, but that was partly because of a running down of inventories. Underlying demand was better, and given the strength of business and consumer confidence, the outlook for growth in 2026 is more positive.

Import prices aren't rising quickly, but they do remain elevated, supporting PPI in a way that wasn't true during Japan's long deflation. More interesting now is the strength of export prices, a dynamic that boosts exporter profits, and via the terms of trade, provides a tailwind for domestic income

Takaichi's huge win comes when the cycle is looking stronger, with real wages close to rising, manufacturing sentiment improving and bank lending strong. This should give the BOJ confidence, and, with the current account surplus in 2025 reaching the highest level in forty years, also help the JPY.

With policy efforts reducing headline inflation, the bullish case for Japan is once again a rise in real wages that pushes up consumer spending and aggregate demand. The consumer confidence survey points to just that scenario, but it isn't in the hard data yet, with December retail sales still soft.

My latest video, discussing the work I've been doing looking at Japan's fiscal position.

Some of the slowdown in services PPI inflation is due to lower goods price inflation, but the combined result points to softer downstream inflation. SPPI inflation in high labour-intensive sectors is still over 3% YoY, but the recent MoM run-rate of under 2% is too low for the BOJ's inflation target

The BOJ's full outlook report that was released today includes analysis arguing that the pass-through from JPY to CPI has risen, reflecting not only greater direct effects, "but also stronger secondary spillover effects, such as more active wage- and price-setting behavior of firms"

At its meeting today, the BOJ was again more positive on the outlook, but only incrementally. However, the authorities overall have been trying to put a lid on market volatility, perhaps via intervention, but also an interview by Takaichi. Data, meanwhile, show the economy still has good momentum.

Japan's current run of PPI inflation is almost the longest since at least the 1980s, but looks well-supported. Prices have recoupled with the global cycle, and are being boosted by JPY weakness. Furthermore, while it was feared that tariffs would be deflationary, export prices are rising.