Our economic outlook for Japan
December 05, 2024
Our outlook for year-end 2025
1.2%
Economic growth,
year over year
We expect Japan’s economy to recover to a growth rate above 1% in 2025, with the driver shifting from exports to a pickup in domestic demand. Risks from the global economy may increase uncertainty, with potential tariffs by the U.S. offsetting China’s policy stimulus, though the overall impact for Japan is likely to be limited.
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
We expect the BoJ to embark on a rate-hiking cycle, with the policy rate rising to 1% by the end of 2025. However, we expect the pace of rate hikes to be gradual given concerns about the yen and capital market stability. Global trade developments may also prompt the BoJ to proceed with caution. On the other hand, a pace of Federal Reserve easing that is only mild would weaken the yen, giving the BoJ more conviction to hike. On balance, the risk is tilted toward the downside.
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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