Our economic outlook for Japan
August 12, 2025
Door opens for next interest rate hikes
“Persistent inflationary momentum and an easing in trade uncertainty warrant the Bank of Japan resuming policy interest rate increases.”
Grant Feng,
Vanguard Senior Economist
A structural labor shortage in Japan continues to reinforce a virtuous wage-price spiral for a nation that had long struggled with deflation. Inflation remains firmly above target and the labor market is tight, even as growth momentum has weakened. And although capital expenditures have become increasingly volatile and political uncertainty has intensified following the recent Upper House election, improvements in employment and income have supported domestic demand.
Corporate sentiment is showing signs of recovery in the wake of a July 22 tariff agreement with the United States. Although recent spikes in import prices and food costs are expected to fade, underlying inflationary pressures remain intact.
We expect the Bank of Japan to proceed with monetary policy normalization, gradually moving from its current 0.5% rate target toward a neutral policy stance closer to 1% as economic conditions evolve in line with its forecasts.
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.