Our economic outlook for Japan
March 21, 2025
Our outlook for year-end 2025
1.2%
Economic growth,
year over year
We expect a recovery in private consumption to continue in 2025 behind upward momentum in wage growth, which would support above-trend growth. We expect the overall impact of global economic uncertainty stemming from potential U.S. tariff hikes to be limited, offset by positive spillover from policy stimulus in China. Japan’s economy grew at a materially slower pace in the fourth quarter of 2024 than originally estimated. GDP increased at an annualized 2.2%, according to the bureau’s second estimate, slower than the 2.8% reflected in the first estimate. Consumption was flat as higher food prices left less for discretionary spending.
2.1%
Core inflation, year over year
Steady wage growth on the back of strong corporate profits and structural labor shortages will likely support a recovery in domestic consumption and keep core inflation robust at around 2% in 2025. More importantly, a virtuous cycle of wages and inflation will continue to strengthen—a positive development after decades of economic and market stagnation—potentially justifying further Bank ofJapan (BoJ) rate hikes.
1.0%
Monetary policy rate
The BoJ, watchful for further progress in union labor negotiations and global trade developments, kept its policy rate on hold at 0.5% on March 19. But recent developments would appear to keep the BoJ on track to raise its policy rate. An umbrella organization representing retail, restaurant, and other industry unions at 2,200 mostly large companies said on March 13 that it had secured average raises of 5.37% for its 1.9 million workers. The raises, the first announced in the annual nationwide Shunto negotiations, were larger than expected and support growth in real incomes and consumer spending. We expect the BoJ to keep abreast of further wage negotiations before gradually raising the policy rate to 1.0% by year-end. Such a progression would nonetheless keep monetary policy accommodative.
2.4%
Unemployment rate
Japan is confronted by a structural labor shortage, which has recently been somewhat alleviated by a greater labor participation rate for women and older people, and by the addition of more foreign workers. The shortage is nonetheless likely to exert continued upward pressure on wages.
What I’m watching
A strengthening of Japanese wage and consumption growth
Sanguine consumer confidence and a rebound in private consumption, supported by rising wages following favorable spring wage negotiations, have boosted the Japanese economy. The strength of the recovery in consumption lends credence to the Bank of Japan’s longstanding view that a “virtuous cycle” could exist between rising wages and sustainable rates of inflation. Looking ahead, we expect the improving wage growth and consumer confidence to give policymakers more conviction to raise, albeit gradually, their short-term interest rate target, which has not exceeded 0.5% in 30 years.
Grant Feng,
Vanguard Senior Economist
Japanese wage growth and consumer confidence indexes
Notes: Real wages are adjusted for inflation. Monthly data reflect the period from January 2015 through August 2024.
Sources: Vanguard calculations, based on Cabinet Office and Ministry of Health, Labour and Welfare of Japan data from CEIC Data, as of October 22, 2024.
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