Overall, indicators show that Japan's short-term financing risk is low. The indicators that need monitoring in the short run are mostly related to public finances, with very large levels of fiscal deficit and public debt. The latter already stood at 236% of GDP in 2019, rising to around 250% in 2022, before receding and expected to remain around 225-230% until 2027. The fiscal deficit remains high but has slowly declined: from -9.1% of GDP in 2020, it declined to around -2% in 2024 and around -3% in 2025. It is now expected to stabilize around this level in 2026 and 2027. Debt-servicing costs remain manageable, given still-low interest rates (despite recent rises). Currency risks are also limited as most of the debt is denominated in JPY and domestically owned.

In the long run, a shift to more expansive fiscal policies could put Japan’s debt sustainability at risk. Furthermore, the Japanese economy’s vulnerabilities mostly stem from a declining, aging population – with gains in productivity not enough to compensate and a resistance to immigration. The working-age population (between age 15 and 64) has been declining in Japan since 1996. The old-age dependency ratio remained at 70% in 2024, the highest amongst major developed countries. The fertility rate in Japan declined to 1.2 in 2023, a record low. Climate change is another long-term risk for Japan, which, as an archipelago, is vulnerable to rising sea levels and more intense weather events.

Japan’s business environment is relatively well-positioned in our assessment of 185 economies, rated in the best range in the majority of the sub-components, although it seems to be slightly deteriorating. The 2025 Heritage Foundation’s Index of Economic Freedom survey assigns Japan rank 28 out of around 185 economies, reflecting particularly good scores with regards to property rights, judicial effectiveness, government integrity and monetary freedom, while there remains room for improvement regarding government spending, and fiscal health receives an alarmingly low score. Meanwhile, the World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business friendly and the level of corruption is low. Our proprietary Environmental Sustainability Index puts Japan at rank 117 out of 210 economies, reflecting strengths in water stress and CO2 emissions per GDP, but weaknesses in terms of the recycling rate and renewable electricity output while energy use per GDP has recently been deteriorating.

The Liberal Democratic Party (LDP) obtained a supermajority in the February 2026 House of Representatives snap election, ensuring strong political stability, reinforced  by its coalition with the Japan Innovation Party. This will enable Prime Minister Sanae Takaichi to pursue her policy agenda. We expect her to continue the expansionary fiscal policies she began outlining after her election in October 2025. In particular, we anticipate that she will support cost-of-living relief measures, promote development in the AI and semiconductor sectors and increase defense spending. While she will not face legislative constraints, she could face some limitations from potential market reactions to her policies. The next elections for the House of Representatives are scheduled to take place in 2030.