Our economic outlook for Japan
June 25, 2025
Global trade uncertainty warrants cautious stance by BoJ
“The Bank of Japan will likely take a more cautious stance, given the elevated level of trade uncertainty and capital market volatility concerns.”
Grant Feng,
Vanguard Senior Economist
Domestic demand was robust in the first quarter, with private consumption increasing for the fourth consecutive quarter, but real GDP growth turned negative due to a deterioration in net exports.
Looking ahead, we expect private consumption to remain resilient. Wages continue to rise steadily, and as inflation—primarily driven by food prices—gradually stabilizes, consumer confidence and real incomes are poised to improve. While there is a risk that companies may delay investment decisions amid tariff-related uncertainties in the near term, the structural labor shortage will continue to prompt more investments to enhance productivity.
The Bank of Japan (BoJ) left its policy rate target unchanged at 0.5% on June 17. It noted that Japan’s economic growth is likely to moderate amid global uncertainty related to trade and other policies. But it said it expects accommodative financial conditions to lend support. We have lowered our expectations for the year-end policy rate from 1% to 0.75%, suggesting the BoJ will raise the rate target once more this year. Inflation remains above the BoJ’s target, though risks to both growth and inflation skew to the downside owing to tariff developments.
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.
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