1. Japan Economy

Current state of the economy: Subdued Growth Amid the Absence of a Clear Growth Driver.

Real GDP
(Quarter-on-Quarter Annualized Rate, Contribution)

Source: Cabinet Office.

Real GDP growth in Q4 2025 (October–December) registered an annualized quarter-on-quarter increase of +0.2%. While this marked a return to positive growth for the first time in two quarters, the rebound was extremely weak relative to the sharp contraction of –2.6% recorded in Q3.

Residential investment rose strongly by +4.8% quarter-on-quarter, but other demand components underperformed expectations, resulting in only modest overall growth. Residential investment had declined sharply by –8.4% in Q3 due to a payback from front-loaded demand ahead of legal revisions. With that negative effect having run its course, a rebound occurred in Q4. Indeed, without the positive contribution from residential investment—equivalent to +0.7 percentage points on an annualized basis—the economy would have recorded a second consecutive quarterly contraction.

It is also important to note that inventories exerted a substantial drag of –0.8 percentage points (annualized) on growth in the quarter. Excluding this inventory effect, final demand expanded at an annualized +1.1% (Q3: –2.2%). Thus, the underlying picture was not as weak as the headline figure suggests. On balance, there is little need to revise the assessment that Japan’s economy remains in a gradual recovery phase. Many indicators outside GDP continue to show resilience, and the overall situation does not warrant excessive pessimism.

That said, the latest GDP data underscore the continued absence of a clear growth engine. Private consumption—the main pillar of domestic demand—rose by just +0.1% quarter-on-quarter, while business fixed investment increased by +0.2%, both restrained by the lingering effects of elevated inflation. Exports also edged down by –0.3%, highlighting the lack of momentum from external demand. The prolonged impact of high prices continues to weigh on the economy, leaving growth subdued and lacking a strong sense of recovery.

Economic outlook: Gradual Economic Recovery Supported by Overseas Growth and Rising Real Wages.

Japan’s Economic Outlook (Yearly)

Note: Forecasts are by the Dai-ichi Life Research Institute.

Source: Cabinet Office, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications.

For Q1 2026 (January–March), we project annualized growth of +1.6% quarter-on-quarter. A gradual pickup in exports is expected amid continued strength in the U.S. economy, while moderating inflation is likely to allow real wages to bottom out, thereby providing additional support to domestic demand.

Throughout 2025, wage growth lagged inflation, resulting in sustained declines in real wages. However, policy measures—including the abolition of the former provisional gasoline tax rate and the resumption of electricity and gas subsidies—are likely to push CPI inflation below +2% year-on-year in Q1 2026. As a result, real wages are expected to return to positive territory, easing pressure on household incomes and helping to stabilize private consumption.

We expect the economy to continue a gradual recovery in FY2026. Solid U.S. economic performance and an improvement in real household income are expected to underpin growth.

In the United States, interest rate cuts implemented during 2024–25 are likely to support real economic activity in 2026 with a lag. In addition, the implementation of the Trump tax cuts should help underpin domestic demand, while the negative impact of tariffs is expected to have peaked. Whereas policy measures acted as a drag on the U.S. economy in 2025, they are likely to become a tailwind in 2026. Robust demand related to generative AI is also expected to persist, increasing the likelihood of continued U.S. economic strength.

Although the ongoing slowdown in China remains a concern, the global economy as a whole is expected to recover gradually, supporting moderate growth in Japanese exports. The recovery in exports, together with resilient corporate earnings, should encourage business fixed investment. Additional drivers—including digitalization, labor-saving investment, and research and development spending—are also expected to contribute positively to growth.

Another supportive factor is the recovery in real wages. In the 2026 spring wage negotiations, we forecast wage increases of 5.45% (Ministry of Health, Labour and Welfare basis; 5.52% in 2025), marking the third consecutive year of gains in the 5% range.

Momentum for wage increases remains firm amid intensifying labor shortages, growing recognition among both labor and management of the need to restore real wages after a prolonged period of high inflation, and corporate profitability remaining at elevated levels, supported by effective price pass-through and the smaller-than-expected impact of tariffs. As cost-push pressures recede and inflation moderates, real wages in FY2026 are likely to remain modestly positive. Policy measures—including expanded tuition-free high school education, free elementary school lunches, and a higher income threshold for secondary earners—are also expected to support household income.

Given that elevated inflation has eroded households’ purchasing power and constrained the pace of recovery, the anticipated improvement in real income in FY2026 represents a welcome development and should contribute to stabilizing private consumption.

2. US Economy

Current state of the economy: Labor Market Softening Amid Policy Uncertainty, but Resilience Persists

In the U.S., the ongoing implementation of tariffs—aimed at reshaping foreign relations under “America First” principles—alongside an aggressive crackdown on illegal immigration, has increased economic uncertainty and contributed to a softening labor market. However, the broader economy remains robust, bolstered by expanding AI investment and other structural factors. Meanwhile, inflation has proven stubborn, resisting a decline toward target levels.

The U.S. economy maintains its resilience into early 2026. In the January ISM Report on Business, which measures business sentiment, the manufacturing index rose 4.7 points from the previous month’s 47.9 to 52.6, marking its first move above the 50.0 expansion-contraction threshold in 11 months. The non-manufacturing index reached 53.8, matching the previous month’s level and maintaining its highest point since October 2024 (55.8), reaffirming the service sector’s role as the primary driver of growth.

In the labor market, nonfarm payrolls increased by 130,000 in January—the fastest pace since December 2024 (following a revised 48,000 increase in the prior month). Private sector employment grew by 172,000, showing a significant acceleration, while the three-month moving average rose to 103,000 (from 50,000). The unemployment rate fell further to 4.3% in January (from 4.4%), remaining relatively low despite the recent uptick.

Regarding inflation, the core Consumer Price Index (CPI), excluding energy and food, rose 0.3% month-on-month in January (up from 0.2% in December). While the annualized rate over the past six months gradually declined to 2.5% (from 2.6%), the year-on-year increase also slowed to 2.5% (from 2.6%). However, current figures may understate actual price growth; imputed rents and rental prices—major CPI components—were estimated as flat in October 2025 due to data disruptions from the government shutdown, likely resulting in a downward bias in the reported rate of increase since that period.

US labor situation

Source: US Department of Labor

US core CPI

Source: US Department of Labor

At the FOMC meeting held on January 27–28, 2026, the Federal Reserve decided to maintain the federal funds rate target range at 3.50% to 3.75%, as expected, for the first time in four meetings. The decision was reached with 10 members in favor and 2 opposed. The Fed revised its economic assessment upward, stating that activity has accelerated from a “moderate” to a “solid” pace. It also upgraded its labor market outlook, noting that stabilizing unemployment suggests the recent softening is concluding and downside risks have abated. However, the Fed maintained that inflation remains “somewhat elevated” relative to its 2% long-term target. Chairman Powell noted that the 75-basis-point cuts since September 2025 have brought the policy rate into a “neutral range,” supporting growth while ensuring inflation resumes its decline once the transitory impact of tariff hikes dissipates.

Economic Outlook: Growth to Accelerate to the Mid-2% Range in 2026

The effective tariff rate is estimated to have risen significantly to a peak of approximately 16.8% (up from 2.4% in 2024), which is expected to subtract 0.5–0.7 percentage points from real GDP growth. However, this is likely to be offset by the “One Big Beautiful Bill Act (OBBBA),” enacted on July 4, 2025. This fiscal package combines major tax cuts—including the extension of the 2017 Tax Cuts and Jobs Act (TCJA)—with significant spending reductions in social programs, while increasing defense and border security budgets. The stimulative effects are expected to peak in 2026, boosting real income and consumption. This fiscal tailwind, combined with investment tax cuts, could lift real GDP by 0.4–0.8 percentage points, more than compensating for the tariff-related drag.

Real GDP growth for the October–December quarter of 2025 (delayed by the shutdown) is expected to slow to an annualized +2.5% range, primarily due to a decline in imports. However, rising real interest rates and prices have constrained personal consumption and housing investment, alongside the impact of the partial government shutdown. During this period, the unemployment rate was 4.5% and private sector employment increased by only 29,000 from the previous month, suggesting that "jobless economic growth" has persisted. For the full year 2025, real GDP growth is expected to slow to +2.2% (from +2.8% in 2024), though it remain above the potential growth rate of +1.8%.

In 2026, growth is projected to accelerate to +2.4% for the year, driven by the reopening of government agencies and the full impact of tax cuts. Personal consumption will be supported by rising asset values (stocks and real estate) and tax cuts. Capital investment is also expected to rise, fueled by IT demand, reduced uncertainty following trade agreements, and increased direct investment. Furthermore, exports of agricultural products and energy are expected to expand under the new trade agreements.

Overall, the U.S. economy is poised to continue growing above its potential in 2026. While the unemployment rate is expected to remain stable below 4.5%, non-farm payrolls may average only about 90,000 per month, indicating a continued “jobless economic expansion.” As inflation may rise gradually as tariff costs pass through, the Federal Reserve is expected to remain cautious about any further interest rate cuts in 2026.

US economic outlook (YoY, %)

Source: US Department of Commerce,Our forecast

Note: Contribution is in parentheses

U.S. real GDP growth (SAAR)

Source: US Department of Commerce. Forecast is our own.

3. European Economy

Current State of the Economy: Overcoming the Rebound from Last-Minute Exports, Economic Recovery Gains Momentum

In recent years, the eurozone economy has been held back by stagnation in Germany, which has fallen into a structural recession due to persistently high energy prices and delays in transformation of the industrial structure, and in France, grappling with political turmoil and fiscal uncertainty. Meanwhile, the expansion has been supported by the robust performance of former fiscal trouble spots such as Spain, Portugal, Greece, and Ireland. These countries have been buoyed by funding from the European Recovery Fund, strong tourism demand, increased immigration inflows, and economic activity driven by multinational corporations.

The eurozone's real gross domestic product (GDP) recorded strong growth of +2.3% quarter-on-quarter annualised in the January-March 2025 quarter, driven by a rush of exports ahead of US tariff hikes. This slowed to +0.6% quarter-on-quarter annualised in the April-June quarter as a reaction, but recovery accelerated to +1.1% in the July-September quarter and +1.4% in the October-December quarter. The decline in exports to the US following the tariff hike has been offset by robust exports to other countries. Furthermore, the easing of uncertainty surrounding tariff negotiations has led to the resumption of economic activity that had been postponed, bolstering the economic expansion. Furthermore, the impact of Germany – which had previously maintained a restrictive fiscal stance – revising its ‘debt brake’ (which mandated a balanced budget) and steering towards fiscal expansion, primarily focused on infrastructure investment, defence spending, and climate change measures, is gradually becoming apparent.

The eurozone's annual growth rate for 2025 was at +1.5%, accelerating from the low growth of the past two years (2023: +0.5%, 2024: +0.8%) and returning to its potential growth rate. By country, Germany continues to struggle at +0.4%, though it has emerged from two years of negative growth (2023: -0.7%, 2024: -0.5%). France remained at low growth of +0.9%, impacted by rising interest rates due to fiscal concerns and policy stagnation stemming from political turmoil. Spain did not reach the previous year's +3.5%, but continued to grow at a high rate of +2.8%. Although Ireland's actual figures for the October-December period have not been finalised, it is highly likely that it recorded high growth exceeding 10%, supported by last-minute exports.

Even after entering 2026, business sentiment continued to improve, and the economy remained on a moderate recovery trend. The United States suggested the possibility of raising tariffs on some European countries over Greenland, a Danish autonomous territory, but immediately withdrew its tariff hike policy, avoiding a resurgence of tariff concerns.

Meanwhile, consumer prices in the eurozone are calming down from historically high inflation as energy and food price rises have paused. The high wage increases agreed as a delayed response to past price rises have also subsided, and the rate of increase in service prices, which had remained high, has slowed. The European Central Bank (ECB), which had been cutting interest rates, has refrained from further cuts since July last year, partly due to the spreading signs of economic recovery.

Real GDP for Major Euroarea Countries

Source: Eurostat, Dai-ichi Life Research Institute

Harmonised Index of Consumer Prices in Euroarea

Source: Eurostat, Dai-ichi Life Research Institute

Economic Outlook: Recovery Gains Momentum Bolstered by Fiscal Expansion

In response to shifts in Europe’s security environment, European nations beyond Germany are also moving to increase defence spending. The European Union (EU) will temporarily exempt defence expenditure from its fiscal rules to support member states’ defence capabilities, while also providing necessary fiscal funding through the issuance of EU bonds. Germany’s historic shift in fiscal policy and the moves by European nations to bolster defence capabilities will gain full momentum from 2026 onwards.

Alongside the materialisation of these fiscal expansion effects, factors such as reduced uncertainty surrounding tariffs and global trade, and an improved environment for personal consumption driven by easing inflation and accelerating wage growth, are likely to underpin the euro area's economic recovery over the coming years. Eurozone real GDP is expected to expand at a pace slightly above potential growth throughout 2026, buoyed by fiscal expansion. Although the pace is forecast to moderate somewhat in 2027 as the impact of fiscal policy wanes, a steady recovery is anticipated to continue. The annual growth rate is projected to slow to +1.4% in 2026, partly reflecting a reaction to the boost from export surges at the beginning of 2025. However, it is expected to re-accelerate to +1.6% in 2027, continuing an expansion in line with potential growth.

The Recovery Fund, which has supported the economic recovery of EU member states following the containment of the novel coronavirus, is scheduled to end at the close of 2026. Over 30% of the allocated funds remain unspent. The deadline for applying for additional funding is the end of August, and a rush of applications could boost the economy during 2026. Conversely, concerns have been raised about a potential economic slowdown from 2027 onwards following the fund's termination. However, the fiscal funds provided to member states through the recovery fund do not immediately translate into economic activity, such as public investment. Furthermore, even after public investment momentum wanes, the effects of various structural reforms required for additional funding are expected to support the economy.

Potential downside risks to this recovery scenario include: (i) a sharp and significant appreciation of the euro causing economic headwinds; (ii) Germany's structural issues resurfacing once the effects of fiscal stimulus fade; (iii) financial market volatility before and after the French presidential election in 2027; (iv) renewed trade friction with the US over tariff agreement implementation; and (v) heightened geopolitical tensions in Ukraine and the Middle East.

While sustained economic expansion is confirmed, the risk of downward pressure on prices due to a strengthening euro also exists. Consequently, the ECB is likely to maintain a wait-and-see stance for the time being. With the acceleration of the economic recovery, it is anticipated that the ECB will begin revising its forward guidance, with an eye towards a future shift towards interest rate hikes.

Outlook of the Euroarea Economy (YoY, %)

Note: Figures in brackets are contributions to real GDP growth. No breakdown is available for 2025 at the time of publication.

Source: Dai-ichi Life Research Institute

4. China and Emerging Asian Economies

Current state of economy: China’s Economic Growth in 2025 Meets Government Target; Export rush ahead of full implementation of Trump Tariffs bolsters Emerging Asian Economies.

China’s economic growth rate reached +5.0% in 2025, achieving the government’s target (around 5.0%) set at the 2025 session of National People’s Congress. In NCP, Chinese authorities indicated a policy of expanding exports to countries and regions other than the U.S., in anticipation of escalating U.S.-China tensions. Furthermore, although the RMB continued to appreciate against the USD in financial markets, the currency basket weighted by major trading partners’ currencies (CFETS RMB index) declined, resulting in a continued effective depreciation of the RMB. This helped maintain export competitiveness and supported exports to countries and regions outside the U.S. As a result, while exports to the U.S. fell sharply by 23.0% yoy in 2025, total exports maintained an expansionary trend, rising 5.5% yoy.

Meanwhile, domestic demand-particularly private consumption-has lacked strength. This reflects the prolonged real estate downturn, delays in employment recovery, and the waning effects of domestic demand stimulus measures implemented by Chinese authorities since the second half of 2024. Nevertheless, since China’s GDP statistics are compiled based on supply-side data, GDP has continued to expand, supported by consistently growing industrial production. Therefore, despite numerous uncertainties on the demand side, China’s economy has continued to expand, driven primarily by supply-side factors.

Many emerging Asian economies are structurally more dependent on external demand, and their relatively high share of exports to the U.S. raised concerns about the adverse impact of Trump Tariffs. However, in 2025, “front-loading” ahead of the full implementation of Trump Tariffs boosted exports. Although the U.S. initially set high tariff rates on various countries, subsequent negotiations led to broad-based reductions in those rates, thereby mitigating the impact. In addition, while the U.S. appears to have included provisions in agreements with other countries calling for measures against China’s transshipment (indirect) exports, the definition of such exports has not yet been clarified, and the impact remains limited at this stage.

Moreover, as inflation, particularly in essential goods such as food, has peaked and subsided, inflationary pressures in many countries have eased. Central banks of Emerging Asisn Economies have responded by supporting domestic demand through interest rate cuts. Consequently, both domestic and external demand have shown signs of expansion recently, and as a result, economic growth in 2025 remained relatively solid in most countries.

It should also be noted that the U.S. significantly increased tariffs on India, citing India’s expanded imports of Russian crude oil since the Ukraine War. Although the Indian economy has relatively low dependence on exports to the U.S., the Indian government supported economic activity by stimulating domestic demand, including reductions in the Goods and Services Tax (GST), which also contributed to moderating inflation. Furthermore, this month the U.S. agreed to lower tariffs on India, and India has also reached an agreement with the EU (European Union) to conclude a free trade agreement (FTA). These developments are expected to lower external demand hurdles for the Indian economy.

RatingDog China Mfg. and Services PMI

Source: S&P Global

S&P India Comp. PMI and ASEAN Mfg. PMI

Source: S&P Global

Economic Outlook: China is expected to continue its unbalanced growth, while other Emerging Asian Economies are anticipated to face various challenges.

Following the U.S.-China summit in October 2025, the two countries showed signs of mutual compromise, and there have also been moves to seek the path for improving relations ahead of President Trump’s visit to China in April this year. Although exports to the U.S. fell sharply in 2025, a rebound effect is expected to contribute to a bottoming-out of exports to the U.S. in 2026. Moreover, tariffs imposed by the U.S. on China after the second Trump administration stand at 20%, roughly the same level as those applied to major ASEAN countries (19-20%).

In recent years, amid escalating U.S.-China tensions, China has expanded transshipment (indirect) exports via emerging Asian economies. However, the economic benefits of such arrangements have declined substantially. At the same time, China significantly increased exports to countries and regions other than the U.S. in 2025, raising the hurdle for further expansion. Although the RMB has continued to appreciate against the USD since the second half of 2025, there remains a possibility that Chinese authorities will effectively guide the currency weaker in real terms, under the banner of strengthening countercyclical and cross-cyclical adjustments, in order to support exports.

Meanwhile, financial markets expect Chinese authorities to introduce additional measures to stimulate domestic demand. However, the deepening real estate downturn shows no clear prospect of recovery, and as the push toward “New Quality Productive Forces” reduces employment opportunities across a broad range of sectors, domestic demand is likely to exhibit an increasingly pronounced “K-shaped” pattern. At the National People’s Congress to be held in March, the government is expected to set a relatively ambitious growth target, but economic expansion is likely to remain unbalanced, driven primarily by the supply side.

Easing U.S.-China tensions could, in principle, provide some tailwinds for emerging Asian economies, which are structurally more dependent on external demand. However, differences in tariff rates have become less significant in terms of export competitiveness, and China’s indirect exports through third countries are also likely to shrink. Looking ahead, once Trump Tariffs are fully implemented, a backlash from earlier front-loaded exports will be unavoidable. With China’s economy also losing momentum, it will be difficult for emerging Asian Economies’ exports to absorb the decline in exports to the U.S..

Against this backdrop, as China seeks to expand exports, emerging Asian economies may face intensifying competition, including the threat of China’s “exporting deflation.” On the other hand, under the U.S.-India trade agreement, the U.S. has significantly reduced tariffs on India. Combined with slowing inflation and policy rate cuts by the central bank, private consumption in India has recently shown signs of strengthening. In the short term, therefore, expanding domestic demand is expected to support the Indian economy.

Although inflation in emerging Asia has remained subdued, it is projected to accelerate going forward, potentially complicating central bank policy management and weighing on domestic demand, including private consumption. With numerous uncertainties surrounding external demand, governments are expected to step up efforts to support growth. Nevertheless, the structural characteristics of each countries are likely to play a decisive role in shaping economic performance in the period ahead.

Economic Growth Rates in China, India, NIES, and ASEAN5 Countries

Source: CEIC data. The light blue areas indicate our forecasts. For India, data are based on the fiscal year (From April to March).

Original in Japanese:
https://www.dlri.co.jp/report/macro/580653.html