Our economic outlook for Japan

The persistence of tariff challenges is likely to have a significant impact on Japanese exporters. While the direct effects of tariffs may be limited, the uncertainty they create can dampen business confidence and investment, leading to a more cautious approach by the Bank of Japan (BoJ) as it considers rate hikes.

Still, a virtuous cycle of wages and inflation is likely to support the economy. Nationwide wage negotiations for unionized workers are tracking above last year’s increases, which were the largest in 33 years. Prices continue to rise, and a structural labor shortage has buoyed capital expenditures as firms seek to enhance productivity. The cycle is likely to strengthen, keeping core inflation above the BoJ’s 2% target throughout 2025.

However, the uncertainty surrounding U.S. tariff policy poses a notable hurdle for the BoJ in assessing its conviction about growth and inflation sentiment in the near term. As a result, we expect the BoJ to pause any rate hikes until the tariff situation stabilizes. That said, the BoJ is likely to stick to its policy-normalization cycle, given that domestic inflation momentum remains above target and wage-price dynamics are strengthening. The BoJ left its policy rate unchanged at 0.5% on May 1.