Japan’s Economy: Monthly Outlook (Aug 2025)

◆In light of the announcement of the Apr-Jun 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 +0.8% in FY2026. (On a calendar year basis, we expect +1.1% in 2025 and +0.7% in 2026).

◆Although 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 as a result of the spring labor negotiations, and a decline in the rate of growth in prices. Due to wage hikes, the price pass-through cycle and other factors, we expect the growth rate trend in CPI to be 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. It is necessary to be cautious regarding the impact of the Trump tariffs on domestic and overseas economic activity, as well as rising crude oil prices due to tensions in the Middle East.

◆We assume that the Bank of Japan (BOJ) will raise the short-term interest rate to 0.75% in the Oct-Dec 2025 period 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. Real interest rates are expected to remain negative throughout the forecast period, and monetary conditions are likely to remain accommodative for the time being.