Japan is now deep in stagflation, and it might only get worse from here

Prices in Japan are blowing up while the economy is tanking, and the government looks like it’s scrambling to keep up. Inflation is smashing records, growth is going backwards, and people are stuck in the middle of both.

According to analysts at Bloomberg, the country has officially slid into stagflation, a nasty mix of rising costs and slowing output that hasn’t hit this hard in decades.

The price of rice shot up 98.4% year-over-year in April, the fastest spike since 1971, following a 92.1% increase the month before. At the same time, energy costs rose 9.3%, after government subsidies for gas and electricity were phased out in March.

Inflation gains speed while growth shrinks

The consumer price index, excluding fresh food, jumped 3.5% compared to last year, rising from 3.2% in March. This is the fifth straight month inflation has stayed above 3%. But while everything is getting more expensive, the economy is shrinking.

Japan’s GDP fell 0.7% in the first quarter of 2025, the first drop since early 2024. On an annualized basis, the economy slipped 0.3%, based on median estimates from economists.

This slide is showing cracks that formed even before the US tariff measures kicked in fully. Toru Adachi, an economist, said, “Japan is having its own version of stagflation. Consumer spending isn’t robust enough to support a moderate recovery on the whole.” And with numbers like these, there’s no recovery in sight yet.

The pressure is hitting politics too. Prime Minister Shigeru Ishiba, who took office in October, is seeing his approval ratings crash to new lows.

The sharp inflation has made everything worse for him as he heads into the summer upper house elections. A poor economic print will only push the ruling party closer to rolling out a new stimulus package, which many are already whispering about inside Tokyo.

Trade talks are not moving as fast as they should

Meanwhile, President Donald Trump’s tariffs are raising serious concerns in Japan, and relief doesn’t seem close. On May 9, Commerce Secretary Howard Lutnick said deals with Japan and South Korea would “take significantly more time” than the one Trump reached earlier this month with the UK.

“You’ve got to spend an enormous amount of time with Japan, South Korea. These are not going to be fast deals,” Howard said in an interview with Bloomberg Television. His comments made it clear that Japan shouldn’t expect quick help while it’s already stuck fighting rising prices and falling output.

Howard also brought up India, saying the country has been “leaning in really hard” and might be next in line for a deal. But it won’t be easy. “When you talk about India, it’s probably 7,000 lines” of tariffs that would need to be modified under a possible agreement. He added, “It just takes time, and it just takes work — so give us a chance, don’t be pushing and rushing.”

Right now, Japan doesn’t have time. It’s dealing with an economy that’s already had six contractions since 2021, while the US only had two during the same period. Its potential growth rate, estimated at 0.6% by the Cabinet Office, is the lowest in the G7. That means even small shocks — like losing subsidies or facing tariffs — can send the whole thing into a spiral.

Seiji Shinke, another economist, put it bluntly: “Of course a major risk is being created by Trump, one person. So the outlook could shift dramatically if he changes his mind. But it’s hard to be upbeat about the economy right now and I can’t deny the chance of a recession.”

It’s not just about Japan either. Some analysts now worry that Trump’s tariff strategy could kick off a global stagflation cycle, choking off growth while pumping up prices. And Japan, already deep in it, could be the first sign of what’s to come elsewhere.

Howard, trying to spin some optimism, said the initial deals made with other countries could help act as templates for the rest. “We’re trying to show people a frame for how to do business so that we can roll much more quickly, right?” he said.

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