Overview
The Bank of Japan's "Outlook for Economic Activity and Prices" (July 2025) maintains a cautiously optimistic view of Japan's economy while raising the real GDP growth forecast for fiscal 2025 to 1.0% (from 0.9% in the previous forecast).
For economic outlook, the report projects Japan's economy will continue moderate recovery. Real GDP growth is forecast at 1.0% for FY2025 (revised up 0.1 points), 1.1% for FY2026 (unchanged), and 1.0% for FY2027 (unchanged). The upward revision for FY2025 reflects recent better-than-expected corporate performance and signs of recovering consumption.
The consumption outlook notes ongoing recovery as the impact of rising prices on household purchasing power gradually eases. With spring wage negotiations resulting in high wage increases for the second consecutive year and expectations for continued wage growth, real wage improvements are expected to support consumption recovery. However, lingering concerns about future income among some households require continued monitoring.
For prices, the CPI (excluding fresh food) is forecast at 2.5% for FY2025 (unchanged), 2.1% for FY2026 (up 0.1 points), and 2.0% for FY2027 (up 0.1 points). While service prices are rising moderately reflecting wage increases, the inflation rate is expected to gradually approach 2% as extraordinary factors such as past import price increases dissipate.
The report emphasizes several risk factors. Overseas economic trends, particularly the pace of U.S. economic deceleration and China's economic trajectory, could significantly impact Japan through trade and financial markets. Rising geopolitical risks related to Ukraine and the Middle East pose concerns about resource price fluctuations and supply chain disruptions. Domestically, uncertainty remains about the pace and sustainability of the wage-price virtuous cycle.
Financial markets require careful monitoring as global monetary policy normalization progresses, with potential for increased volatility. The interaction between financial and foreign exchange market movements and their impact on the real economy needs attention. Given these risks, the Bank indicates it will maintain accommodative financial conditions while carefully assessing economic and price developments.
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The Bank of Japan's "Outlook for Economic Activity and Prices" (July 2025) maintains a cautiously optimistic view of Japan's economy while raising the real GDP growth forecast for fiscal 2025 to 1.0% (from 0.9% in the previous forecast).
For economic outlook, the report projects Japan's economy will continue moderate recovery. Real GDP growth is forecast at 1.0% for FY2025 (revised up 0.1 points), 1.1% for FY2026 (unchanged), and 1.0% for FY2027 (unchanged). The upward revision for FY2025 reflects recent better-than-expected corporate performance and signs of recovering consumption.
The consumption outlook notes ongoing recovery as the impact of rising prices on household purchasing power gradually eases. With spring wage negotiations resulting in high wage increases for the second consecutive year and expectations for continued wage growth, real wage improvements are expected to support consumption recovery. However, lingering concerns about future income among some households require continued monitoring.
For prices, the CPI (excluding fresh food) is forecast at 2.5% for FY2025 (unchanged), 2.1% for FY2026 (up 0.1 points), and 2.0% for FY2027 (up 0.1 points). While service prices are rising moderately reflecting wage increases, the inflation rate is expected to gradually approach 2% as extraordinary factors such as past import price increases dissipate.
The report emphasizes several risk factors. Overseas economic trends, particularly the pace of U.S. economic deceleration and China's economic trajectory, could significantly impact Japan through trade and financial markets. Rising geopolitical risks related to Ukraine and the Middle East pose concerns about resource price fluctuations and supply chain disruptions. Domestically, uncertainty remains about the pace and sustainability of the wage-price virtuous cycle.
Financial markets require careful monitoring as global monetary policy normalization progresses, with potential for increased volatility. The interaction between financial and foreign exchange market movements and their impact on the real economy needs attention. Given these risks, the Bank indicates it will maintain accommodative financial conditions while carefully assessing economic and price developments.