By Max Sato
–Japan Downgrades View on World Economy For 1st Time In 8 Months Amid Weaker Chinese Data, Uncertainty Over US Trade Policy
–Bank of Japan Expected to Stand Pat for Now, on Gradual Normalization Path After 25-bp Policy Rate Hike to 30-Year High of 0.75% in December
(MaceNews) – Japanese government policymakers repeated their long-held view that the wobbly but resilient domestic economy is likely to remain on a modest recovery track, counting on continued wage hikes at a solid pace amid labor shortages and pointing to a pickup in consumer sentiment in light of easing inflation.
Defying the dampening effects of stiff Trump tariffs on autos and metals, Japan’s exports posted their fourth straight year-on-year increase in December to hit a record high of ¥10.41 trillion, surpassing the previous high of ¥9.91 trillion reached in December 2024. Japanese-made computer chips drew strong demand from Europe while Asia snatched non-ferrous metals amid global copper supply shortages.
In its monthly report for January released Thursday by the Cabinet Office, the government maintained its overall assessment, saying the economy is “recovering at a moderate pace, although the effects of the U.S. trade policy are seen mainly in the auto industry.” The official assessment was last upgraded in August 2024, following a downgrade in February that year.
In Friday’s data, Japan’s consumer inflation is expected to decelerate sharply by seven to eight ticks in two of the three key measures in December to around the Bank of Japan’s 2% price stability target, in reaction to a double-digit percentage rise in energy costs a year earlier.
It is also thanks to the recent easing trend in processed food price hikes that had seen a spike caused by protracted domestic rice supply shortages and higher import costs. An expected sharp slowdown in total CPI’s annual rate mirrors a drop in fresh food prices.
The core CPI (excluding fresh food) is forecast to rise 2.4% on the year in December, down sharply the 3.0% increase in November. The total CPI is expected to rise 2.1%, also slowing down from 2.9% previously. Underlying inflation, as measured by the core-core CPI that excludes both fresh food and energy, is seen easing slightly to 2.8% from 3.0%.
On the policy front, the Bank of Japan’s nine-member board is expected to stand pat on Friday and at the next few meetings, staying the course of gradual policy normalization, after having decided unanimously to raise the target for the overnight interest rate by 25 basis points (0.25 percentage point) to a 30-year high of 0.75% at its last meeting on Dec. 18-19. The board pointed to easing uncertainties over U.S. trade rows and growing expectations that firms will continue raising wages into fiscal 2026 staring in April.
In its quarterly Outlook Report to be issued on Friday, the board’s median forecast for the year-on-year increase in core CPI (excluding volatile fresh food prices) is expected to be little changed at 1.8% in fiscal 2026 that begins on April 1 and 2.0% the following year. Given the resilient economy despite the Trump tariff storms, the board’s median GDP projection is likely to be revised up slightly to around 1.0% for fiscal 2026 from 0.7% projected in October while the 1.0% growth forecast for 2027 is expected to be unchanged.
BOJ Governor Kazuo Ueda told a news conference on Dec. 19 that the board would discuss the need to raise rates further, taking “one meeting at a time” and that its policy decisions would be “data- and information-dependent.” After the latest action, the short-term rate at 0.75% is “still slightly below the lower end of the estimated neutral rate,” he said, referring to the evasive measure often described as a moving target that is neither too stimulative nor too restrictive to economic activity.
The December action was the bank’s first rate hike since January 2025, when it lifted the policy rate by 25 basis points to 0.5% in an 8 to 1 vote amid increasing signs that major firms would maintain substantial wage hikes into fiscal 2025. It was also its fourth increase during the current normalization process that began in March 2024 with its first rate hike in 17 years and an end to the seven-year-old yield curve control framework in a 7 to 2 vote. In July 2024, the board voted 7 to 2 to hike the policy rate to 0.25% from a range of 0% to 0.1%.
In its near-term outlook, the government repeated its recent statement, saying, “The improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the U.S. trade policy needs a close watch.”
“In addition, the effects of continued price increases on private consumption through a downturn in consumer sentiment are also downside risks to the Japanese economy,” it warned. The government also repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”
As for overseas economies, the government downgraded its view for the first time in eight months in light of weak Chinese data. Geopolitical tensions have also intensified as the world faced a renewed threat from U.S. President Donald Trump that he would impose stiff tariffs on imports from the countries that opposed his ambitions to acquire Greenland, an island territory controlled by Denmark.
Later, Trump announced on Wednesday that he was canceling his planned tariff on U.S. allies in Europe, noting that he and the leader of the 32-member military alliance North Atlantic Treaty Organization agreed to a ‘framework of a future deal’ on Arctic security. Given the unpredictable nature of Trump’s policymaking, Japanese officials remain cautious about the global economic outlook.
“The world economy continues to show gradual recovery while some regions are showing weakness. However, there remains uncertainty after the United States raised tariffs,” the Japanese government said. Last month, it said, “The world economy continues to show gradual recovery while it is pausing in some regions. However, there remains uncertainty after the United States raised tariffs.”
The U.S. economy is “expanding moderately” despite uncertainties, the government said, keeping its basic assessment of the world’s biggest economy that has shown resilience. It maintained its view that the Eurozone is “showing signs of a pickup.”
The official view on China was downgraded for the first time in 18 months as the world’s second-largest economy is now “slowing gradually,” instead of “pausing” despite the effects of Beijing’s stimulative measures.
Key points from the monthly report:
The government maintained its assessment of private consumption that accounts for about 55% of the GDP, saying that it is “showing signs of a pickup.”
Japan’s real household spending posted an unexpected rebound in November, up a decent 2.9% on year (vs. consensus -1.4%), led mainly by a jump in automobile purchases due to a routine shuffle of household samples, which boosted overall expenditures by 2.77 percentage points.
The fact that November this year had 12 days in the weekends and public holidays, up from 10 a year earlier, also lifted spending on refrigerators among other durable goods while cold weather pushed up demand for winter clothing. Some households also spent more on wedding dresses and receptions.
The core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, climbed at a slower pace of 1.8% on year in November after rising 1.5% the previous month, when overall spending plunged 3.0%, which was the first decline in six months mainly due to a pullback in automobiles.
On the downside, elevated costs of living have kept consumers frugal in recent years. The November data showed many households continued to trim the funds sent to kids studying away from home and the gift money given at weddings and funerals. There is also a widespread move to switch to more affordable mobile communications plans.
The average real income of households with salaried workers slumped 2.2% on year in November after slipping 0.1% in October, being unchanged in September and rebounding 2.8% in August. The average real income of the primary rice earners posted its sixth straight fall, down 3.5%. By contrast, their spouses’ average income rose 2.1% for the fifth consecutive gain.
The government continues to term industrial production as “flat.”
In the latest data to be released on Jan. 30, Japan’s industrial production is projected to post a slight drop on the month in December and a sharp rebound in January. Factory output slipped back a deeper-than-expected 2.6% in November for the first dip in three months and a sixth decline this year, taking a breather after having climbed to a nearly two-year high in October with a 1.5% rise. The drag from the protectionist U.S. trade policy became more apparent in the final quarter of 2025.
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would dip 0.6% in December, led by slower production of communications equipment, general machinery and vehicles, before surging 8.0% in January on vehicles, production machinery and semiconductors.
The government maintained its assessment of exports after downgrading it for the first time in 12 months in its July report, saying they are “largely flat.”
Trade data showed released Thursday showed Japan’s export values posted a fourth straight rise on year in December, up 5.1%, backed by the recent pickup in export volumes and reflecting solid demand from Europe and Asia that is offsetting the drag from depressed auto exports to the United States. Exports hit a record high of ¥10.4 trillion, surpassing the previous high of ¥9.91 trillion reached in December 2024.
The pace of increase slowed from the 6.1% gain in November. Shipments to the key U.S. market slipped back to an 11.1% drop to ¥1.81 trillion from a year earlier when they stood high at ¥2.03 trillion. Japanese exports to the U.S. had posted their first rise in eighth months in November, rising 8.8% to ¥1.82 trillion. By contrast, exports to China rose 5.6% on year to hit a record high of ¥1.81 trillion and those to Asia as a whole were also at a record level of ¥5.70 trillion.
For the whole of 2025, Japanese exports climbed 3.1% on the year for the fifth straight gain, hitting a record high of ¥110.45 trillion vs. ¥107.09 trillion in 2024. The increase was led by solid demand for computer chips, food and engines to the European Union and Asia minus China. Shipments of steel, auto parts and autos were down as stiff Trump tariffs kicked in.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
Private consumption is “showing signs of a pickup” (unchanged; upgraded in September 2025; downgraded in February 2024).
Business investment in equipment and software is “picking up moderately” (unchanged; upgraded in September 2025; downgraded in November 2023).
Housing construction “has a weak undertone” (unchanged; upgraded in August 2024; downgraded in August 2025).
Public investment is “firm” (upgraded in August 2025; downgraded in December 2025).
Exports are “largely flat” (unchanged; upgraded in February 2025; downgraded in July 2025).
Imports are “largely flat” (unchanged; upgraded in May 2025; downgraded in November 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “pausing among some firms in the face of the effects of the U.S. trade policy” (unchanged; upgraded in March 2025; downgraded in August 2025).
Business sentiment is “largely flat” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; downgraded in January 2023).
Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
Domestic corporate goods prices are “rising gradually” (unchanged; last changed in November 2025).
Consumer prices are “rising” (unchanged: last changed in November 2024).