Japan’s Economy: Monthly Outlook (May 2024)

◆In light of the announcement of the Jan-Mar 2024 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 +1.0% in FY2024, and +1.4% in FY2025 (on a calendar year basis we expect +0.4% in 2024 and +1.7% in 2025).

◆The rate of wage increases in the 2024 spring wage negotiations was considerable, and this means that real wages will likely shift upwards on a y/y basis in the Jul-Sep period of 2024. Regular salary increases of general workers rose +1.8% y/y in FY2023, while in comparison to this rate, regular salary increases are expected to rise to the middle of the 3% level in FY2024. Meanwhile, Japan’s economy can expect to find underlying support and growth factors including the Flat-amount Cut of Personal Income Tax and Personal Residence Tax, recovery production in motor vehicles, growth in inbound consumption, the high level of household savings, and the recovery of the silicon cycle. 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 raise interest rates further at a gradual pace, while closely monitoring economic and price conditions. According to our main scenario, we expect 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 twice yearly, totaling 0.50% annually. However, an accommodative monetary environment will likely be maintained, with real short-term interest rates remaining in negative territory throughout the forecast period. If there is increasing risk of higher prices due to the further weakening of the yen, we believe that the BOJ will raise long-term interest rates through a more flexible pace of government bond purchases or a reduction in the amount of purchases.