Japan’s Economic Outlook 2025

Barclays (LON:BARC) analysts predict a resurgence in Japan’s economy by 2025, driven by domestic demand and strong wage growth despite risks from U.S. trade policies and domestic political uncertainty.

GDP Growth

Real gross domestic product (GDP) is projected to grow by 1.2% in FY25, surpassing the potential growth rate of 0.8%. This recovery follows a modest 0.5% expansion in FY24, impacted by disruptions like the Noto Peninsula earthquake and early 2023 auto factory suspensions.

Wage Negotiations

The annual spring wage negotiations, known as “shunto,” are expected to yield a 5% wage increase, consistent with FY24 levels. This is attributed to efforts to address structural labor shortages and changes in corporate profit-sharing practices.

Growth and Inflation Cycle

These wage hikes are anticipated to strengthen consumption and foster a virtuous cycle of growth and inflation. Barclays forecasts inflation to stay around 2% in 2025, with a slight dip in the latter half as the yen strengthens and energy subsidies normalize. Core inflation, excluding energy and perishables, is expected to remain stable due to higher labor costs and robust services inflation.

Monetary Policy Predictions

On monetary policy, Barclays anticipates the Bank of Japan to raise rates in March and October, with a terminal rate of 0.75%. However, political uncertainty, both domestically and internationally, could affect the timing of these adjustments.

Political Considerations

Concerns linger regarding potential U.S. tariffs under the incoming Donald Trump administration and Japan’s domestic political instability, as the LDP-Komeito coalition navigates its minority government status.

Analysts warn that prolonged uncertainty regarding global trade policies or Japan’s political situation could negatively impact capital expenditures and business sentiment, especially within the manufacturing sector.