Japan’s tariff turbulence to flatten near-term growth
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.
We assume that the effective US tariff rate on Japanese goods will stay at 16%, up from 2% at the end of 2024. The US has postponed its 24% ‘reciprocal’ tariff for 90 days, but a universal 10% tariff and higher tariffs for autos and steel will continue to be applied. We don’t think Japan’s government will impose retaliatory tariffs, hoping to reach a deal with the US within 90 days.
Weaker growth will likely result in lower inflation once the ongoing supply-driven food inflation abates. We now think the CPI will rise by 1.6% in 2026, down from our prior 1.8% projection. While lowered import prices suggest input cost pressures will be tame, weaker domestic growth will limit firms’ pricing power.
We now think the Bank of Japan won’t rush to hike the policy rate. We expect the BoJ will maintain the current policy rate this year and next, and only raise rates in 2027. The political cost of continuing to hike rates is high when a sense of crisis is widely shared across the nation.
