October 17, 2024
Our outlook for year-end 2024
0.2%
Economic growth,
year over year
Stronger-than-expected growth in the second quarter underscores that a solid economic recovery is underway, driven by a rebound in domestic demand. Consumer sentiment is rising along with improving household incomes. Second-quarter GDP was 0.7% quarter over quarter, according to a second reading from the Cabinet Office. We anticipate full-year 2024 growth of around 0.2%, slightly above consensus, and a materially stronger 2025.
2.5%
Core inflation, year over year
A year-over-year measure of core inflation increased for the fourth consecutive month in August, reaching 2.8%. Meanwhile, headline inflation touched 3.0% for the first time in 10 months, up from 2.8% in July. On a month-over-month basis, core inflation, which excludes volatile fresh food prices, rose by 0.4%. The BOJ’s preferred measure of core inflation, which excludes both energy and fresh food prices, shot up to 0.5%, its greatest month-over-month gain in more than a year. With real (after-inflation) wage growth having turned positive for the first time in more than two years, we expect a strengthened pass-through to broad-based inflation. We foresee full-year headline and core inflation of around 2.5%, above the BOJ’s 2% inflation target.
0.5%
Monetary policy rate
The BOJ has raised its policy interest rate twice this year, from a negative level to 0.25%. The BOJ left the policy rate unchanged at its September 20 meeting but noted that it expects the economy to grow “at a pace above its potential growth rate” and as accommodative financial conditions support “a virtuous cycle from income to spending.” The BOJ would typically be expected to time any change in its policy rates with the release of its quarterly outlook report, the next of which is scheduled for January 2025. However, we believe that forthcoming inflation data and results of the third-quarter Tankan survey of businesses could lead the BOJ to raise interest rates at its December 19 meeting. We expect that an increase in real wages and inflation will give the BOJ confidence to continue rate hikes in 2025 as the country emerges from an era of stagnation.
2.4%
Unemployment rate
Japan’s unemployment rate held steady at 2.7% in August. The number of unemployed individuals fell by 110,000, reversing a drop of the same magnitude in July, as the labor force and the number of employed individuals grew. Japan is confronted by a structural labor shortage, which has recently been somewhat alleviated by a greater labor participation rate for women and older people, and by the addition of more foreign workers. The shortage is nonetheless likely to exert continued upward pressure on wages.
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