Japan’s Economy: Monthly Outlook (Feb 2025)

◆In light of the announcement of the Oct-Dec 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 +0.7% in FY2024, and +1.3% in FY2025, and +1.1% in FY2026. (On a calendar year basis we expect +1.5% in 2025 and +1.1% in 2026).

◆We expect the growth trend in real wages to become clearly established with the continuation of wage hikes as a result of the spring labor negotiations. Growth of around +1% y/y is expected to be maintained in FY2026. 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 other factors. However, vigilance is necessary regarding changes in the external environment, including the policies of the US Trump administration (“Trump 2.0”), and major appreciation of the yen.

◆We assume that the Bank of Japan (BOJ) will raise the short-term interest rate to 0.75% in the Jul-Sep 2025 period (July in monthly terms), followed by additional rate hikes at a pace of once every six months, 0.25%pt at a time. Short-term interest rates are expected to reach 1.50% by the end of the forecast period. Real interest rates will remain in negative territory throughout the forecast period, maintaining an accommodative monetary environment for the time being.