Japan Key Themes 2025: Rising threats from external uncertainty

We expect Japan’s economy to maintain a modest pace of growth in 2025, amid domestic challenges and growing external threats. The secular labour shortage will continue to raise wages and inflation in a sustainable and irreversible manner. The Bank of Japan (BoJ) will continue gradual interest rate normalization supported by generous fiscal support to vulnerable households. Meanwhile, the prolonged strength of the US dollar and uncertainty about Trump’s tariffs could complicate decision-making.

In this report, we delve into five key questions shaping Japan’s economic outlook in 2025:

• Will wage growth continue in 2025? Against the background of an intensifying secular labour shortage and the associated rise in labour turnover, Rengo (the Trade Union Confederation) revealed its basic plan for the 2025 Spring Negotiation in October, calling for a pay rise “above 5% y/y”. What will be the final outcomes? How will various firms respond, and how might this influence profitability?
• What is the outlook for consumption in 2025? We project that Japan’s economy will maintain a modest pace of growth in 2025, mainly driven by consumption. However, consumption will likely lack buoyancy, as not all households will benefit from wage growth, and supply shocks could squeeze real income.
• Could another yen carry trade crisis emerge in 2025? The risk that the prolonged strength of the US dollar will persist has risen. The interest rate differentials in the US and Japan will remain large and could induce another wave of yen carry trading. In such a case, the weak yen may come back as a major driver of the BoJ’s rate decision.
• What impact might Trump’s tariffs have? In our current baseline scenario, we assume that the US will impose a 10% tariff on Japan’s autos and metals exports to the US. In addition, Japanese firms, particularly in the auto sector, must evaluate how tariffs might affect global supply chains and returns from foreign affiliates, given their established global supply networks and their position as exporters of capital.
• Will fiscal mismanagement destablise the JGB market? Without discussion on revenue measures, generous household support will continue and the US may demand more burden sharing. If the JGB market becomes volatile, the BoJ may need to adjust the QE exit plan.

Download the full report to uncover our full analysis.