Our economic outlook for Japan

Despite a seasonal hiccup, Japan’s economy remains resilient, supported by solid domestic demand and a limited impact of higher U.S. tariffs. However, signs of strain are emerging, particularly in the form of declining profits among large manufacturers.

On the inflation side, although food price growth is moderating, recent yen depreciation may exert upward pressure on prices in the near term. While the impact of earlier cost shocks, such as elevated import prices and rising food costs, is expected to fade, underlying inflationary pressures remain intact. These are driven by persistent structural labor shortages, which are pressuring wages upward and reinforcing what for Japan is a virtuous cycle between wage growth and price increases.

We do not expect the new administration’s priority of combating inflation to interfere with independent policy decisions by the Bank of Japan (BoJ). The BoJ remains focused on wage growth and its transmission to household consumption, and the persistence of household spending improvements will be key to future policy actions. We maintain our base case scenario of a BoJ rate hike in December. However, the timing will depend on wage and consumption trends. Should micro-level wage data fail to demonstrate sufficient momentum, the next rate hike could be deferred beyond 2025.