Japan Economic Forecast

GDP shrank more than expected in Q3, likely leading to more fiscal and monetary stimulus ahead. The contraction was due to a decline in fixed investment and a deceleration in exports. In addition, consumer spending unexpectedly dipped, likely due to the recent rise in inflation affecting household budgets more than expected. Turning to Q4, our panelists expect GDP to rebound. However, the recovery is expected to be weak, with catch-up growth from Covid-19 now largely exhausted; compared to Q3, in October, business activity grew less—according to the PMI—and consumer confidence slipped. As a result of this weak performance in H2 so far, in early November, the government unveiled a stimulus package worth JPY 17 trillion (around 3% of last year’s GDP). In addition, the Bank of Japan (BOJ) is now likelier to keep interest rates below zero for longer.

Inflation in Tokyo rose to 3.3% in October from 2.8% in September, while core inflation in the capital rose to 2.7% from 2.5%. Nationwide data will be released on 24 November. The rise will pressure the BOJ to tighten policy despite anemic growth. Nonetheless, our panelists expect inflation to average around the BOJ’s target in 2024, before averaging below it in 2025.