Our economic outlook for Japan
January 24, 2025
Our outlook for year-end 2025
1.2%
Economic growth,
year over year
We foresee 2025 growth above trend at around 1.2%, driven by a pickup in domestic demand as wage gains outpace inflation. Risks from the global economy may increase uncertainty, with potential U.S. tariffs offsetting China’s policy stimulus, though the overall impact for Japan is likely to be limited.
2.1%
Core inflation, year over year
Steady wage growth on the back of strong corporate profits and structural labor shortages will likely support a recovery in domestic consumption and keep core inflation robust at around 2% in 2025. More importantly, a virtuous cycle of wages and inflation will continue to strengthen—a positive development after decades of economic and market stagnation—potentially justifying further Bank ofJapan (BoJ) rate hikes.
1.0%
Monetary policy rate
The BoJ raised its policy rate target by 25 basis points to 0.5% at its January 24 meeting. Should the economy and inflation progress in line with our outlook, we continue to expect the BoJ to raise its policy rate target to 1% by the end of 2025. The timing and scale of hikes will depend on the outcome of nationwide union wage negotiations, potential U.S. tariffs, market volatility, and domestic politics. Risks skew downward, given heightened uncertainty and Japan’s historically deflationary mind-set. Even with modest rate hikes, monetary policy will remain accommodative, with the policy rate below that of other economies as well as the nominal neutral rate.
2.4%
Unemployment rate
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.
What I’m watching
A strengthening of Japanese wage and consumption growth
Sanguine consumer confidence and a rebound in private consumption, supported by rising wages following favorable spring wage negotiations, have boosted the Japanese economy. The strength of the recovery in consumption lends credence to the Bank of Japan’s longstanding view that a “virtuous cycle” could exist between rising wages and sustainable rates of inflation. Looking ahead, we expect the improving wage growth and consumer confidence to give policymakers more conviction to raise, albeit gradually, their short-term interest rate target, which has not exceeded 0.5% in 30 years.
Grant Feng,
Vanguard Senior Economist
Japanese wage growth and consumer confidence indexes
Notes: Real wages are adjusted for inflation. Monthly data reflect the period from January 2015 through August 2024.
Sources: Vanguard calculations, based on Cabinet Office and Ministry of Health, Labour and Welfare of Japan data from CEIC Data, as of October 22, 2024.
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