| Summary |
- Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions.
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- The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) is likely to be at around 2.5 per cent for fiscal 2024 and then be at around 2 per cent for fiscal 2025 and 2026. While the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices are expected to wane, underlying CPI inflation is expected to increase gradually, since it is projected that the output gap will improve and that medium- to long-term inflation expectations will rise with a virtuous cycle between wages and prices continuing to intensify. In the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target. Through fiscal 2025, it is also expected that the dissipation of the effects of the government's measures pushing down inflation will make a positive contribution to the year-on-year rate of increase in the CPI (all items less fresh food), whereas factors such as the recent decline in crude oil and other resource prices will make a negative contribution.
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- Comparing the projections with those presented in the previous Outlook for Economic Activity and Prices (Outlook Report), the projected real GDP growth rates are more or less unchanged. The projected year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2025 is somewhat lower due to factors such as the recent decline in crude oil and other resource prices.
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- Concerning risks to the outlook, there remain high uncertainties surrounding Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behaviour. Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices. In particular, with firms' behaviour shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices. About
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- the risk balance, risks to economic activity are generally balanced. Risks to prices are skewed to the upside for fiscal 2025.
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| I. Current Situation of Economic Activity and Prices in Japan |
| Japan's economy has recovered moderately, although some weakness has been seen in part. Overseas economies have grown moderately on the whole. Exports and industrial production have been more or less flat. Corporate profits have improved and business sentiment has stayed at a favorable level. In this situation, business fixed investment has been on a moderately increasing trend. The employment and income situation has improved moderately. Private consumption has been on a moderately increasing trend despite the impact of price rises and other factors. Housing investment has been relatively weak. Public investment has been more or less flat. Financial conditions have been accommodative. On the price front, the year-on-year rate of increase in the CPI (all items less fresh food) has been at around 2.5 per cent recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, although the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned. Inflation expectations have risen moderately. |
| II. Baseline Scenario of the Outlook for Economic Activity and Prices in Japan |
| A. Baseline Scenario of the Outlook for Economic Activity |
| Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions. |
| The projected real GDP growth rates are more or less unchanged from those presented in the previous Outlook Report. |
| In the household sector, employment is likely to continue rising, but the pace of increase is projected to moderate gradually. This is because it will become more difficult for the labour supply to increase, with the labour force participation of women and seniors having advanced to a high degree thus far. That said, these developments will lead to an increased tightening of labour market conditions during the economic recovery. In this situation, nominal wages are expected to keep increasing clearly, partly reflecting price rises and employee income is projected to continue increasing. Against this backdrop, for the time being, although private consumption is expected to be affected by the price rises, it is projected to continue increasing moderately, mainly reflecting the rise in wage growth. Private consumption is also projected to be underpinned, for the time being, by the government's initiatives such as the continuation of measures to reduce the household burden of higher gasoline prices. |
| Somewhat lower due to factors such as the recent decline in crude oil and other resource prices. |
| The outlook for the CPI (all items less fresh food) depends on the assumptions regarding crude oil prices and the government's measures. Crude oil prices are assumed to decline moderately toward the end of the projection period with reference, for example, to developments in futures markets. The government's measures to reduce the household burden of higher gasoline prices, electricity charges, and gas charges had pushed down the year-on-year rates of change in the CPI (all items less fresh food) up through fiscal 2023. For fiscal 2024 and 2025, the phasing out of these measures is projected to push up the rates. Looking at the CPI (all items less fresh food and energy) -- which is not directly affected by fluctuations in energy prices -- the year-on-year rate of increase is likely to be at around 2 per cent, as services and other prices are expected to continue rising moderately, reflecting factors such as wage increases, although the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices are projected to wane gradually. |
| The main factors that determine underlying inflation are assessed as follows. The output gap, which captures the utilization of labour and capital, has followed an improving trend, albeit with fluctuations. Based on the aforementioned outlook for economic activity, the gap is likely to widen moderately within positive territory toward the end of the projection period. Meanwhile, labour market conditions are expected to tighten to a greater extent than can be explained by the changes in the output gap, partly due to a deceleration in the pace of increase in labour force participation of women and seniors, and upward pressure on wages is projected to intensify. This is likely to put upward pressure on personnel expenses on the cost side and contribute to an increase in households' purchasing power. |
| Medium- to long-term inflation expectations have risen moderately. Firms' inflation outlook for general prices in the Tankan (Short-Term Economic Survey of Enterprises in Japan) has increased moderately. Given that the formation of inflation expectations in Japan is largely adaptive, the increase in inflation seen thus far has brought about a rise in households' and firms' medium- to long-term inflation expectations. Firmsbehaviouror has shifted more toward raising wages and prices, and nominal wages have increased clearly. In addition, moves to reflect wage increases in selling prices have continued to strengthen. Regarding the outlook, inflation expectations are expected to rise moderately, with continued improvement in the output gap and changes in firms' wage- and price-setting behaviour. Under these circumstances, the virtuous cycle between wages and prices is projected to keep intensifying through the achievement of wage increases that reflect price rises and through a pass-through of wage increases to selling prices. |
| Considering the above assessments, underlying CPI inflation is expected to increase gradually, mainly reflecting the improvement in the output gap and the rise in medium- to long-term inflation expectations; in the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target. That said, there remain uncertainties regarding this outlook, and it is necessary to carefully monitor factors such as firms' wage- and price-setting behaviour. |
| For the full document click the link below: |
| Japan: Outlook for Economic Activity and Prices (October 2024) |
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