Japan’s Economy: Monthly Outlook (Feb 2024)

◆In light of the announcement of the Oct-Dec 2023 GDP 1st preliminary results, we have revised our economic outlook. We now see growth in Japan’s real GDP according to our main scenario at +1.3% in FY2023, and +0.8% in FY2024, and +1.3% in FY2025 (on a calendar year basis we expect +0.4% in 2024 and +1.4% in 2025).

◆The rate of wage increases in the 2024 spring wage negotiations may rise to the 4% level, and this means that real wages will likely shift upwards on a y/y basis in the Jul-Sep period of 2024. Due to the cycle created by wage increases and price pass-through, the trend in the inflation rate is expected to stabilize at around 2%. Meanwhile, the economy is expected to be supported by recovery production for motor vehicles, growth in inbound consumption, the recovery in the consumption of services, the high level of household savings, the recovery in the silicon cycle, and comprehensive economic stimulus measures including income tax cuts. Continued vigilance is necessary regarding downside risk in the overseas economy, and the possibility of rising domestic interest rates and the rapid appreciation of the yen must be kept in mind as well.

◆We assume that the Bank of Japan (BOJ) will eliminate its Quantitative and Qualitative Monetary Easing with Yield Curve Control (YCC) and lift its negative interest rate policy (raising the short-term interest rate to 0-0.1%) in April 2024, after which it will raise interest rates at a gradual pace while closely monitoring economic and price conditions (the short-term interest rate will be raised to 0.25% in the Oct-Dec 2024 period, followed by additional rate hikes at a pace of 0.50% per annum). However, an accommodative monetary environment will be maintained, with real short-term interest rates remaining in negative territory throughout the forecast period.