Japan’s Economy: Monthly Outlook (Aug 2024)

◆In light of the announcement of the Apr-Jun 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 +0.9% in FY2024, and +1.3% in FY2025 (on a calendar year basis we expect +0.1% in 2024 and +1.6% in 2025).

◆We expect real wages to continue growing during the 2024 Jul-Sep period and beyond due to wage hikes continuing at a high level as a result of the 2024 spring wage negotiations. We also expect the underlying inflation rate to stabilize at around 2% due to the cycle of wage increases and price pass-through. 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. However, vigilance is necessary regarding downside risk in the overseas economy and the possibility of appreciation of the yen.

◆We assume that the Bank of Japan (BOJ) will raise the short-term interest rate to 0.50% in the Jan-Mar 2025 period, followed by additional rate hikes at a pace of once every six months, 0.25%pt at a time, while closely monitoring economic and price conditions. However, an accommodative monetary environment will likely be maintained, with real short-term interest rates remaining in negative territory throughout the forecast period. We expect the influence of reductions in the amount of government bond purchases by the BOJ on the long-term interest rate to be limited for the time being.