Japan’s Economy: Monthly Outlook (May 2025)

◆In light of the announcement of the Jan-Mar 2025 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 FY2025, and +0.9% in FY2026. (On a calendar year basis, we expect +0.9% in 2025 and +0.9% in 2026).

◆While the level of uncertainty is great due to the US Trump administration’s high tariff policy (Trump tariffs), we expect real wages (real employee compensation per capita) to remain on the positive side on a y/y basis, due to the continuation of wage hikes at a high level in the spring labor negotiations, and a decline in the rate of growth in prices. We also expect the growth rate trend in CPI to be stable at around 2%. 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 trends in the Trump tariffs and the impact they may have on domestic and global economic activity.

◆We assume that the Bank of Japan (BOJ) will raise the short-term interest rate to 0.75% in the Oct-Dec 2025 period (October in monthly terms) while closely monitoring the economy, prices, and financial situation, 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 1.25% by the end of the forecast period, the Jan-Mar period of 2027.