Barclays analysts are forecasting a vibrant economic outlook for Japan in FY25, fueled by heightened domestic demand and solid wage growth. Despite facing challenges from global trade policies and political uncertainties, Japan’s real GDP growth is expected to reach 1.2%, outpacing its potential growth rate of 0.8%.

Key Economic Drivers

1. Wage Growth as a Catalyst

   • The spring wage negotiations (shunto) are anticipated to yield a 5% wage increase, mirroring FY24 outcomes.
   • Structural labor shortages and evolving corporate profit-sharing norms underpin this boost.
   • Rising wages are set to enhance consumption, creating a positive feedback loop for economic growth and inflation.

2. Domestic Consumption

   • Japan’s economic expansion is heavily reliant on domestic consumption, supported by wage gains and ongoing household expenditure.
   • Recovery from past disruptions in FY24, such as the Noto Peninsula earthquake and auto factory shutdowns, is likely to accelerate growth.

3. Inflation Outlook

   • Inflation is projected to hover around 2% in 2025, dipping slightly in the latter half of the year due to yen appreciation and normalization in energy subsidies.
   • Core inflation (excluding energy and perishables) is expected to remain stable, bolstered by rising labor costs and service-related inflation.

Monetary Policy Forecast

Barclays projects that the Bank of Japan will raise interest rates twice in 2025—March and October—ultimately reaching a terminal rate of 0.75%.

• These adjustments correlate with improved domestic economic dynamics and may be influenced by:
• Global Trade Risks: Potential tariffs from the U.S. could pose challenges.
• Domestic Political Landscape: Issues surrounding the LDP-Komeito coalition could impact policy.

Conclusion

Barclays’ encouraging outlook underscores Japan’s ability to leverage wage growth and domestic demand for a sustainable economic recovery. Nevertheless, risks associated with global trade policies and political instability underscore the necessity for cautious optimism.