Tokyo – December 3, 2025
Japan’s economy opened December with a mixed but increasingly dynamic picture: services activity is expanding solidly, factories are still struggling but stabilising, government stimulus and tax breaks are flowing through the system, and bond yields have surged to their highest levels since 2008 as markets brace for a possible Bank of Japan (BOJ) rate hike later this month. [1]
Services-led growth offsets weak factories
The clearest positive signal today comes from fresh business survey data. The S&P Global Japan Services Purchasing Managers’ Index (PMI) rose to 53.2 in November, up from 53.1 in October, marking eight consecutive months of expansion and underscoring robust domestic demand. [2]
Sub‑indices in the survey showed:
- A faster rise in overall new work,
- Service exports falling for a fifth straight month, and
- Employment in services growing at its fastest pace since January, backed by the strongest business confidence this year. [3]
At the whole‑economy level, Japan’s composite PMI output index—combining manufacturing and services—climbed to 52.0 from 51.5, signalling a “modest expansion” of private‑sector activity for an eighth month in a row. [4]
The weak spot remains manufacturing. The Japan Manufacturing PMI stayed below the 50 neutral line at 48.7 in November, though that’s an improvement from 48.2 in October and the slowest rate of contraction since August. New orders have now fallen for about two and a half years, reflecting sluggish global demand, tighter client budgets and ongoing weakness in sectors such as autos and semiconductors. [5]
Input cost inflation for factories accelerated for the fourth consecutive month, driven by higher labour and raw‑material costs, and firms continued raising selling prices in response. Even so, business confidence among manufacturers has reached a 10‑month high, helped by expectations of demand recovery and new product launches, particularly in electronics and transportation equipment. [6]
Taken together, the PMI data show a two‑speed economy: domestic, services‑driven activity is firming, while external‑facing manufacturing is weak but slowly stabilising.
Stimulus, tariffs and GDP: the macro backdrop
Today’s data come against the backdrop of a recent GDP setback and an unusually large fiscal push.
Government figures released in November showed that Japan’s economy contracted at an annualised 1.8% pace in the July–September quarter, the first decline in six quarters, largely due to an export hit from higher U.S. tariffs. [7]
Responding to both that contraction and persistent cost‑of‑living pressures, Prime Minister Sanae Takaichi’s administration has approved a ¥21.3 trillion (around $135–137 billion) stimulus package, the largest since the COVID‑19 pandemic. The package combines:
- Tax cuts worth about ¥2.7 trillion,
- Cash handouts (including payments per child),
- Subsidies for electricity and gas bills, and
- Strategic investment in sectors such as semiconductors, shipbuilding and artificial intelligence. [8]
To fund this, the government has finalised an extra budget of ¥18.3 trillion, financed largely by about ¥11.7 trillion in new government bonds. Even with that additional borrowing, total bond issuance for the fiscal year is projected at ¥40.3 trillion—slightly below last year’s ¥42.1 trillion, a figure officials cite to argue they are not abandoning fiscal discipline. [9]
Externally, the tariff story is far from over. In Washington, U.S. affiliates of nine Japanese companies, including Toyota Tsusho, Sumitomo Chemical, Ricoh and Yokohama Rubber, have filed suit against the U.S. government, seeking refunds of Trump‑era reciprocal tariffs and asking the Supreme Court to rule those levies illegal. The case underscores how trade frictions are still shaping Japan’s export outlook and corporate planning. [10]
OECD upgrades Japan’s outlook on stimulus and demand
The Organisation for Economic Co‑operation and Development (OECD) today confirmed its global growth forecast for 2026 at 2.9%, but quietly upgraded its view on Japan. In its latest Economic Outlook, the OECD lifted its 2026 growth forecast for Japan to 0.9%, up 0.4 percentage points from September, citing stronger private consumption, business investment and the government’s recently compiled expansionary economic package. [11]
The OECD expects Japan’s domestic demand to be the main growth driver over 2025–27, with US tariffs acting as a modest drag on exports. Inflation, after a persistent bout of food and import‑price pressures, is projected to ease back toward the BOJ’s 2% target over the next couple of years. [12]
In other words, today’s data—solid services, weak but improving manufacturing, high but cooling inflation—fit neatly into the OECD’s narrative of a slow, demand‑driven recovery helped along by fiscal support.
Growth versus discipline: fiscal debate intensifies in Tokyo
Japan’s fiscal stance is now front and centre in the domestic policy debate.
At a plenary session of the House of Councillors today, Prime Minister Sanae Takaichi declared that Japan is “gradually shifting from a cost‑cutting economy under deflation to a growth‑oriented economy.” She reiterated that her government will seek to “increase tax revenue without raising tax rates”, framing her stance as “responsible and proactive” fiscal policy. [13]
Yet just hours earlier, a key Ministry of Finance (MOF) advisory panel, the Fiscal System Council, urged the government to place greater weight on achieving and monitoring the primary budget balance as it prepares the fiscal 2026 budget. The council called for annual, rigorous checks on the budget balance and warned against letting aggressive spending overwhelm fiscal consolidation efforts. [14]
That tension—between Takaichi’s big‑bang stimulus and the MOF’s insistence on fiscal soundness—is likely to dominate economic policymaking into 2026.
Concrete policy tweaks announced today highlight the government’s attempt to balance short‑term support for households with longer‑term sustainability:
- The government and ruling coalition intend to extend Japan’s mortgage loan tax deduction for about five years beyond its scheduled end‑2025 expiry, and are considering enlarging the benefit. Currently, homebuyers can deduct 0.7% of their year‑end outstanding loan balance from income and resident taxes for up to 13 years for new homes (10 years for most pre‑owned homes), subject to loan caps and with extra support for younger and child‑rearing households. [15]
- Separately, a health ministry survey showed that, as of September, market prices for prescription drugs were on average 4.8% below the state‑set official prices. Based on those findings, the government is expected to cut official drug prices in its fiscal 2026 revision, easing the financial burden on patients and health insurers and slightly dampening medical‑related inflation. [16]
These measures add to the patchwork of tax cuts, subsidies and price adjustments that aim to cushion households from high prices while keeping Japan’s mammoth public debt—already the highest among advanced economies—at least somewhat anchored. [17]
Bond market flashes warning as yields hit 17‑year highs
Financial markets are sending a clear message: Japan’s era of near‑zero long‑term rates is over.
Today, the yield on the newest 10‑year Japanese government bond (JGB) climbed to 1.89% in Tokyo interdealer trade, the highest level since mid‑June 2008. Traders attributed the move to rising expectations that the BOJ will not only raise rates at its December meeting but also continue tightening gradually afterward, combined with investor anxiety that Takaichi’s large‑scale economic measures will further worsen Japan’s fiscal position. [18]
At the longer end of the curve, yields are even more striking. The 30‑year JGB yield has recently touched about 3.41%, a record high, as markets price in both sustained inflation and heavier bond issuance in coming years. [19]
These moves extend a trend that has seen Japanese government bond yields climb to multi‑decade highs over the autumn as fiscal policy loosened and investors began to imagine a world in which Japan no longer anchors global bond markets with near‑zero rates. [20]
BOJ and government appear aligned—for now
Monetary policy is the other big variable hanging over today’s data.
In a speech earlier this week, BOJ Governor Kazuo Ueda said the central bank would consider the “pros and cons” of raising interest rates at its December 18–19 meeting, a comment widely interpreted as the strongest hint yet of a coming hike. Markets now see roughly an 80% chance that the BOJ will lift its policy rate from 0.5% to around 0.75%. [21]
Crucially, Ueda framed the move as “easing off the accelerator, not applying the brakes,” arguing that even after another hike, real interest rates would remain deeply negative and monetary policy would still be accommodative. He stressed that:
- Japan’s economy should rebound from the third‑quarter contraction as the impact of U.S. tariffs proves smaller than feared,
- Inflation has stayed above 2% for more than three years, and
- The key issue is whether firms’ new willingness to raise wages will continue into upcoming pay deals. [22]
On Tuesday, newly appointed Finance Minister Satsuki Katayama backed Ueda’s upbeat assessment, saying she saw “no discrepancy” between the government and BOJ views of a “modest” recovery. She also emphasised the need to monitor the persistence of price increases, U.S. trade policy and volatility in global financial markets. [23]
For now, fiscal and monetary policy are pointing in the same pro‑growth direction: a large stimulus package, low but rising interest rates, and a shared goal of achieving 2% inflation accompanied by sustained wage growth.
Yen and equities: turbulence gives way to cautious optimism
Currency and equity markets have been reacting to this policy mix in real time.
In mid‑November, a combination of hefty stimulus plans and worries about delayed rate hikes triggered what one analysis described as a rare “triple” sell‑off in Japanese stocks, bonds and the yen. On November 18, the Nikkei 225 plunged more than 3%, while the yen slipped beyond ¥155 per dollar—its weakest level since January—and tumbled into the ¥180 per euro range, levels unseen since the euro’s launch in 1999. [24]
Ueda’s remarks about a December rate decision have since helped steady the currency. In the immediate aftermath of his speech, the yen strengthened to around ¥155.5 per dollar, and more recent commentary suggests the USD/JPY pair has edged lower as markets refocus on the BOJ’s tightening path. [25]
Equities, meanwhile, are being pulled in two directions:
- Today, the Nikkei 225 briefly reclaimed the 50,000 level and closed up about 1.1% at 49,864.68, driven by renewed enthusiasm for artificial‑intelligence and semiconductor stocks.
- The broader TOPIX index slipped 0.2%, and nearly 70% of Prime Market issues finished lower, a sign that rising yields are weighing on many interest‑sensitive sectors even as tech and growth names rally. [26]
The upshot: Japan’s stock market is buoyant but narrow, with gains concentrated in beneficiaries of AI, chips and a weaker yen, while rate‑sensitive shares face growing headwinds from higher borrowing costs.
Wages and labour market: crucial test for ending deflation
For the BOJ, wage dynamics may be the most important signal in today’s data.
The services PMI shows employment rising at its fastest pace since January and business confidence at its highest this year. [27]
Although we lack full public detail, reporting today indicates that a major metalworkers’ union group is preparing to demand pay increases exceeding this year’s record wage gains in the upcoming 2026 shuntō wage negotiations—a development Ueda has said he is watching closely as proof that firms’ “active wage‑setting behaviour” will continue. [28]
At the same time, other analyses and earlier data show that real wages have struggled to keep pace with inflation, a reminder that households still feel squeezed despite headline pay hikes. [29]
If the combination of a tight labour market, strong service‑sector hiring and union wage demands finally delivers real wage growth, it would help cement the BOJ’s view that Japan has escaped its long‑standing deflationary mindset.
Structural shifts: circular economy, tourism and housing
Beyond the headlines on rates and yields, a handful of stories today highlight how Japan’s growth model is evolving.
- A detailed feature on Valuence Holdings, All Nippon Airways (ANA) and Japan Airlines (JAL) describes how luxury resale and eco‑tourism are becoming part of Japan’s circular economy strategy. Valuence’s pre‑owned luxury goods business is riding a surge in demand from both domestic and overseas visitors, while ANA and JAL promote sustainable aviation fuels and carbon‑offset programmes. Together, they aim to attract tourists who are willing to spend but are increasingly environmentally conscious. [30]
- The planned extension and possible expansion of mortgage tax breaks is likely to support housing demand just as borrowing costs rise from historic lows. By making it cheaper to finance home purchases—especially for younger and child‑rearing households—the government hopes to stabilise the real‑estate market and encourage long‑term household investment. [31]
- Meanwhile, targeted measures such as lower official drug prices and extra budget allocations for coast‑guard and UN peacekeeping activities show how fiscal policy is being used not only to boost near‑term demand but also to reshape spending priorities and ease specific cost pressures. [32]
These micro‑level shifts won’t change the macro picture overnight, but they illustrate how Japan is trying to engineer growth that is greener, more consumption‑driven and less dependent on traditional export‑led manufacturing.
What today’s Japan economy news means
For households
- Job prospects, especially in services, are improving, and wage negotiations heading into 2026 look promising—though inflation remains a real concern. [33]
- Tax cuts, energy subsidies, lower drug prices and mortgage relief should soften some of the blow from higher prices and rising interest rates. [34]
For investors
- Japan is shifting into a new regime of higher but still relatively low interest rates, with 10‑year and 30‑year JGB yields at multi‑decade highs and markets almost fully priced for a December BOJ hike. [35]
- Equity markets remain attractive in sectors tied to AI, semiconductors and tourism, but rate‑sensitive names face growing pressure from higher real yields and uncertainty over the pace of future BOJ tightening. [36]
For global watchers
- Japan’s near‑term growth outlook has improved, according to the OECD, thanks largely to domestic demand and fiscal support, even as U.S. tariffs and legal disputes continue to drag on trade. [37]
- The combination of rising yields, a more active BOJ and large but debt‑funded stimulus means Japan will play a more prominent role in global bond markets, FX dynamics and the broader debate over how to exit ultra‑easy policy.
How well Japan manages that delicate balancing act—stimulating growth, normalising interest rates, and containing debt—will be one of the most important economic stories to watch as 2025 draws to a close.
References
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