Japan inflation to rise to 1.8%, but downside risks are high
Reflecting a surprisingly strong Spring Negotiation result and weaker yen assumption, we have upgraded our baseline wage and inflation forecasts. We now project higher wage settlements will push inflation towards 1.8% by 2027. Uncertainty is high, however.
What you will learn:
- We anticipate the final outcome of the Spring Negotiation this year will likely be a wage rise of around 4.5% or more – much higher than last year’s 3.6%. We upgraded our wage projections for the next few years to reflect more aggressive wage-setting behaviour by top-tier firms.
- The main downside risk to our outlook is the sustainability of wage increases by SMEs. Another downside risk is disappointing demand growth, which will constrain pricing power.
- In our downside scenario, which assumes that these inter-related downside risks materialise, we project the CPI inflation rate would stabilise at 1.6% in 2027.
Tags:
Related Posts
Post
Bank of Japan resumes rate normalisation, cautiously
The Bank of Japan raised the policy rate by 0.25ppts to 0.5% at Friday's meeting, as we expected. We maintain our call that the central bank will hike the rate again to 0.75%, most likely in July after the outcome of the Spring Wage Negotiation is confirmed, especially for small firms.
Find Out More
Post
Trump policies provide tailwinds for industries, with exceptions in Japan
We expect the impact of Trump policies will be a net positive for Japan. The boost from higher import demand due to expansionary fiscal policies will likely overwhelm the adverse impact of targeted tariffs on Japan. The US is Japan's biggest goods export destination, accounting for 20% of total. Most traded items such as machinery and automotives are set to benefit from higher investment demand and consumer spending.
Find Out More
Post
Japan expects mixed impacts from Trump’s second presidency
We've adopted our "limited Trump scenario" as our baseline forecast for Japan. We now assume that the US will impose targeted tariffs on Japan's exports, among several other economies. We think these measures will have a limited impact on overall growth, but globally higher trade barriers are likely to hit Japanese manufacturers' profitability and financial markets. In addition, there is a non-negligible risk that Trump could implement even stricter tariffs.
Find Out More