Japan’s Economy: Monthly Outlook (Nov 2024)

◆In light of the announcement of the Jul-Sep 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 +0.5% in FY2024, and +1.4% in FY2025 (on a calendar year basis we expect -0.2% in 2024 and +1.6% in 2025).

◆We expect real wages (real employee compensation per capita), which grew on a y/y basis for the second consecutive quarter during the Jul-Sep period, to maintain growth of around +1%, due to factors such as significant increases in the minimum wage and civil servants' salaries, and continued high wage increases as a result of the spring wage negotiations. We also expect the growth rate in CPI to be at around 2% due to the cycle of wage increases and price pass-through. Japan’s economy can expect to find underlying support and growth factors including improvement in the household income environment, economic stimulus measures by the government, growth in inbound demand, the high level of household savings, and the recovery of the silicon cycle. However, vigilance is necessary regarding downside risk centering on the overseas economy associated with the policies of the incoming Trump administration and other factors, as well as 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. An accommodative monetary environment will likely be maintained throughout the forecast period. However, if the possibility of the CPI growth rate increasing significantly and exceeding the 2% target becomes imminent due to a significant depreciation of the yen above 170 yen/dlr or other factors occur, the BOJ is expected to move up additional interest rate hikes.