Japan's economy to grow 1.3% in 2025, inflation to remain high: AMRO

While inflation has moderated, it is projected to stay above the Bank of Japan’s (BOJ) target, with consumer price index (CPI) (excluding fresh food) inflation averaging 2.2 per cent in 2025.

Amid ongoing uncertainties surrounding the growth and inflation outlook, the Bank of Japan should maintain a flexible, data-driven approach to monetary policy. Meanwhile, with public debt at elevated levels and rising fiscal pressures due to an aging population, stronger fiscal consolidation efforts will be needed to strengthen fiscal resilience, as per 2024 Annual Consultation Report on Japan published by AMRO.

Japan’s economic growth slowed to 0.1 per cent in 2024 after a post-pandemic rebound, with strong wage-driven consumption supporting recovery. Despite a Q1 contraction, growth rebounded, driven by tight labour markets and corporate earnings. Inflation eased but remained above target, with CPI at 3.0 per cent in December. The BOJ ended yield curve control and negative rates, shifting to short-term interest rates.

The current account surplus rose to 4.8 per cent of GDP, aided by a narrower trade deficit and strong semiconductor exports, though automobile exports were hit by factory closures. Credit growth exceeded 3.3 per cent, with banks remaining stable and profitable.

The fiscal deficit is projected to widen to 3.6 per cent of GDP in FY2024, impacted by tax cuts and higher spending, while public debt remaining high at 240.6 per cent of GDP.

Japan’s macro-financial outlook faces downside risks, driven by global uncertainties. Key concerns include rising commodity prices from geopolitical tensions and a slowdown in major economies. Domestically, slower wage growth could hinder the BOJ’s 2 per cent inflation target, while excessive inflation may force aggressive monetary tightening, straining households, businesses, and fiscal sustainability due to rising debt interest payments.

Persistently large fiscal deficits necessitate a comprehensive fiscal consolidation strategy, combining tax reforms, expenditure rationalisation, and targeted support. Social security and healthcare costs should be curbed, while spending reviews and evidence-based policymaking can enhance efficiency, the report recommended.

To boost long-term growth, Japan should focus on strategic sectors, regional revitalisation, and R&D. Labour productivity improvements through reskilling and welcoming foreign workers can address workforce shortages, it further added.

ALCHEMPro News Desk (SG)