Our economic outlook for Japan

Japan’s GDP growth surprised to the upside in the second quarter, despite U.S. tariff threats, which should allay any fears the Bank of Japan (BoJ) may have of a sharp economic slowdown. GDP grew by 0.5% in the quarter and by 1.7% year over year.

Private capital spending has been a notable growth driver, and consumption continues to recover despite elevated inflation. The impact of U.S. tariffs on the real economy has been limited so far. Net exports contributed 0.3 percentage points to headline growth, which may reflect export frontloading. Corporate sentiment is additionally showing signs of recovery, as agreement with the U.S. over tariffs has significantly reduced uncertainty.

Although the impact of earlier shocks such as elevated import prices and food costs is expected to fade, underlying inflationary pressures remain intact. These are driven by persistent structural labor shortages, which are exerting upward pressure on wages and reinforcing a virtuous cycle between wage growth and price increases.

We expect the BoJ to proceed with its monetary policy normalization, gradually moving from its current 0.5% rate target toward a neutral policy stance closer to 1% as economic conditions evolve in line with its forecasts.