Yasuko Koido 
During the recently concluded three-day Dragon Boat Festival in China, domestic tourism spending reached CNY42.7bn ($5.9bn), with a total of 119mn domestic trips made, rising nearly 6% year-on-year. While per-trip spending dipped, we caution against overinterpreting this single holiday, as travel has become more routine. Broader data points to a shift in Chinese household preferences away from goods and towards services such as tourism.
Japan’s industries, which are exposed more to international demand than to tepid domestic demand, are often concentrated in certain cities. This makes these cities more dynamic than others, a feature masked when only looking at national data. Understanding the industrial landscape helps identify growth opportunities across various sectors, as job creation and incomes drive spending.
The Bank of Japan kept its policy rate at 0.5% at Thursday’s meeting. Considering the significant downgrading of growth and inflation forecasts in its Quarterly Outlook Report, the central bank will likely take a long pause to assess the impact of high global trade policy uncertainty on growth and inflation.
We’ve cut our GDP growth forecasts for Japan by 0.2ppts to 0.8% in 2025 and by 0.4ppts to 0.2% in 2026, reflecting higher US tariffs and heightened global trade policy uncertainty. We now forecast that Japan’s economy will barely grow over 2025-2026 on a sequential basis.
US tariffs of 25% on all automobile and auto parts will weigh heavily on the Japanese and South Korean automotive sectors. A GTAP analysis suggests Japanese and South Korean automotive production will each shrink by approximately 7%. The impact is larger than suggested by bilateral trade data, because vehicles assembled in other countries before being shipped to the US will also be affected, dampening domestic auto parts production.
The ‘Liberation Day’ tariffs, together with separately announced higher tariffs on auto imports to the US, will lead us to cut our growth forecast for Japan. The direct impact of the tariffs will end the modest growth we projected in March, and we now think the economy will barely grow in 2025-2026. This initial estimate does not consider the indirect impact from high trade policy uncertainty and retaliation from other economies.
Oxford Economics, the world’s leading independent economic advisory firm, is excited to announce the launch of its new Japanese website. This important milestone reflects our ongoing commitment to broadening our presence in key regional markets and strengthening our ability to provide localised, high-quality economic insights to businesses and decision-makers in Japan.
The Bank of Japan (BoJ) kept its policy rate at 0.50% at Wednesday’s meeting, as expected. Despite a marginally higher increase in pay than last year at the first round of the spring wage negotiations, our baseline view is for the BoJ to hike its policy rate only gradually due to concerns about the capacity of small firms to raise wages and the lacklustre rate of consumption.
We have revised our CPI forecast upwards for this year and next, due to more persistent supply side-driven food inflation, led by soaring prices of rice. Despite the significant revision to the short-term inflation path, we don’t expect the Bank of Japan (BoJ) to react with a rate hike.
The slew of tariff proposals coming out of the US has added much uncertainty to the highly export-reliant Singapore economy. Given its status as a major shipping hub, potential gains from trade rerouting will probably offset some of the negative impacts of increased tariffs. The upshot is that although Singapore’s prospects are dimmed, they remain relatively promising.
The resilience of consumption is essential to support sustained wage-driven inflation and the Bank of Japan’s rate hikes. We see little risk of spending faltering due to the projected gradual rate hikes to 1% because the ageing of society has made households’ balance sheets less vulnerable to rate increases.
Rising wage costs have been increasingly squeezing the already low profitability of small firms in Japan, thereby raising concerns about the sustainability of the wage-driven inflation dynamics. The evolution of these dynamics will be key in determining how far the Bank of Japan can raise its policy rate in the coming years
Our analysis of industry and trade structure between the US and Japan reveals the auto and non-electrical machinery sectors are most vulnerable to tariffs by the US. For both sectors, the US accounts for a sizeable share of total exports as well as gross output, and particularly so for auto.
The Bank of Japan raised the policy rate by 0.25ppts to 0.5% at Friday’s meeting, as we expected. We maintain our call that the central bank will hike the rate again to 0.75%, most likely in July after the outcome of the Spring Wage Negotiation is confirmed, especially for small firms.
We expect the impact of Trump policies will be a net positive for Japan. The boost from higher import demand due to expansionary fiscal policies will likely overwhelm the adverse impact of targeted tariffs on Japan. The US is Japan’s biggest goods export destination, accounting for 20% of total. Most traded items such as machinery and automotives are set to benefit from higher investment demand and consumer spending.
The Bank of Japan kept its policy rate at 0.25% at Thursday’s meeting, as we expected. We believe that the central bank will raise the policy rate to 0.5% in January 2025 and to 0.75% after confirming the strong outcome of the Spring Wage Negotiation next year, most likely in July.
We’ve adopted our “limited Trump scenario” as our baseline forecast for Japan. We now assume that the US will impose targeted tariffs on Japan’s exports, among several other economies. We think these measures will have a limited impact on overall growth, but globally higher trade barriers are likely to hit Japanese manufacturers’ profitability and financial markets. In addition, there is a non-negligible risk that Trump could implement even stricter tariffs.
We now believe that the Bank of Japan will wait until January to hike the policy rate. We previously assumed a 60% chance of a hike at the meeting on December 19, but recent media reports signal that more board members will likely prefer to wait to see more data to confirm the momentum of wage-driven inflation and US policy developments.
u live in interesting times in US
The first release of the November baseline incorporated the election outcome, but in interesting and uncertain times, our baseline assumptions require more frequent updates to stay current with the evolving balance of risks.
Amid the fast-progressing electric vehicle (EV) shift, maintaining high competitiveness in auto-related sectors and ensuring a smooth labour transition across industries are crucial for the growth of the Japanese economy. As auto production shifts towards EVs, which require different inputs from traditional internal combustion engine cars, parts suppliers will need to adapt to avoid losing market share to foreign players. Change in automotive supply chains would also require workers to move across different industries, a task particularly challenging for Japan.
