Arab News Japan

TOKYO: Economic analysts Oxford Economics (OE) believe that Japan’s economy will maintain a modest pace of growth in 2025, mainly driven by moderate consumption, but a fluctuating yen and US-imposed tariffs could affect Japan’s economy.

With Japan’s projected rise in real household income likely to be relatively small, growth will have limitations, OE says. It notes that high inflation on prices of necessities has restrained consumption for lower income households that have not benefitted so much from wage rises. However, such households do get some financial support, and this is likely to continue. Labor shortages will ensure that wage increases will remain strong.

The prolonged strength of the US dollar may require action by the Bank of Japan to avert a weaker yen to ensure import prices don’t rise. “The risk that the prolonged strength of the US dollar will persist has risen as we project that the US economy is set to outperform other advanced economies in 2025,” OE says.

OE believes uncertainty about tariffs planned by US President-elect Donald Trump could delay firms’ strategic investment and decisions, especially in the auto sector. The direct impact of tariffs on Japan’s trade will likely be limited, but firms need to assess how tariffs will affect global supply chains and returns from foreign affiliates.

“In our current baseline scenario, we assume that the US will impose a 10 percent tariff on Japan’s autos and metals exports to the US,” OE says. “We project that the direct impact of this tariff will not become evident in 2025.”

“However, the impact of Trump’s tariffs on Japanese firms should be considered in a global context given that Japanese firms have established global supply chains and become exporters of capital instead of goods. Higher tariffs on other economies, especially China, will have a significant impact on returns from their foreign affiliates, which will affect corporate profits and stock prices in Japan.”

OE predicts inflation in Japan of around 1.5 percent by mid-2025, rising to 2 percent later in the financial year. The BOJ could raise interest rates to 0.5 percent from 0.25 percent this month and possibly let it rise to 0.75 percent later, depending on Spring Wage Negotiations. It adds that the BoJ will likely wait until spring of 2026 to make a final rate hike to reach 1 percent.