Japan Economics Mid-Year Outlook: Resilience Tested Amid Headwinds

Research evidence excerpt

Japan Economics Mid-Year Outlook: Resilience Tested Amid Headwinds

Japan InsightMMeanwhile, despite a short‑term slowdown, the resilient underlying fundamentals of

Japan’s economy are likely to remain intact. Regardless of how the situation in the

Middle East evolves, we expect labor market tightness driven by demographic factors to

persist. Toward the second half of 2026, higher prices are likely to temporarily slow the

growth of economy‑wide real wages, but the risk that private consumption falls sharply

due to a significant deterioration in employment conditions remains low, in our view.

Exhibit 2: Tankan employment DI signals persistent labor shortages

BoJ Tankan: Employment Condition Diffusion Index (DI)

All industries Manufacturing Non-manufacturing

(pt) 10

DI

-10 Condition

-20

-30 "Excessive"－"Insufficient") Empployment (-40

-50

Source: BoJ, Morgan Stanley Research

In addition to structural tightness in the labor market, we expect wage growth—

particularly among younger workers—to continue, supported by rising inflation

expectations and increased labor market mobility (such as the normalization of mid‑career

hiring by firms and a growing number of workers willing to change jobs).

Looking at actual age‑group wage data for 2025, wage growth displays a barbell

pattern, with higher growth rates among younger and senior cohorts. On average

across all workers, nominal wage growth was below inflation, resulting in negative real

wage growth overall. However, for younger workers, wage growth exceeds inflation,

allowing real wages to remain positive. Moreover, amid persistent labor shortages, a

reassessment of compensation for senior employees working beyond age 60 has

become more widespread, and notably strong wage growth is evident among workers

in their 60s.