Our economic outlook for Japan
July 23, 2025
BoJ adopts cautious stance amid uncertainty, capital market concerns
“We expect the BoJ will stick to its policy-normalization cycle, as domestic inflation momentum remains well above target and wage-price dynamics are strengthening.”
Grant Feng,
Vanguard Senior Economist
Tariff developments have triggered a sharp deterioration in consumer and corporate sentiment, suggesting capital expenditure momentum will fade over the coming quarters. Exports remained relatively firm in the April-May period despite U.S. tariff policy, with declines in auto exports to the U.S. partially offset by exports to Asia and frontloaded tech exports. With U.S.-Japan tariff negotiations proving challenging, we expect uncertainty about ultimate tariff levels and their economic impact to remain high.
We anticipate that the Bank of Japan (BoJ) will not make any changes at its July meeting to its current policy rate target of 0.5%, given the uncertainty surrounding U.S. tariff policy and concerns about capital market volatility. Nevertheless, we expect the BoJ will stick to its policy-normalization cycle, as domestic inflation momentum remains well above target and wage-price dynamics are strengthening. We foresee the policy rate target ending the year at 0.75%.
Japan economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile fresh food prices, as of December 2025. Monetary policy is the Bank of Japan’s year-end target for the overnight rate.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.