By Max Sato
In its monthly report for April released Friday by the Cabinet Office, the government said the economy is “recovering at a moderate pace but confronted by the uncertainty arising from the U.S. trade policy.”
The previous seven statements said the economy was “recovering at a moderate pace, although there are some areas where it is pausing.” That wording was adopted in August, when it upgraded its view, citing the effects of wage hikes in fiscal 2024 ending March 2025 and temporary income tax credits.
Wage hikes announced by major firms for fiscal 2025 are 5.37% in the weighted average and the highest rate in 34 years (base wages are up 3.79%), Japanese Trade Union Confederation (RENGO) said Thursday. That is up from 5.20% tallied about a year ago, which was a 33-year high (base wages growth was 3.57%).
The government is counting on smaller firms to follow in the footsteps of large corporations like Toyota Motor and the retail giant AEON, which in turn should support consumer spending and corporate earnings, leading to higher wage growth. The Bank of Japan is also hoping to see that kind of “virtuous cycle,” the key to generating stable inflation backed by demand, not driven by higher costs.
Looking ahead, “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 is raising downturn risks to growth.” Among the stimulus measures are utility subsidies aimed at helping lower electricity and natural gas bills during the winter heating season from January to March (bills are paid from February to April). The government has also been providing cash handouts to low-income families.
“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.
Last month, it said “the economy is expected to continue recovering at a moderate pace with the improving employment and income conditions, supported by the effects of various policies.” It also warned against downside risks arising from “the effect of continued price increases on private consumption through a downturn in consumer sentiment and the impact of the U.S. trade policy.”
The Bank of Japan’s quarterly Tankan business survey released on April 1 showed confidence among major manufacturers slipped in the March quarter, posting its first decline in four quarters, in the face of stiff tariffs on U.S. imports of metals as well as President Trump’s plans to slap “reciprocal tariffs” on imports from global trading partners. China’s struggling recovery from its property market problems is also seen putting a damper on corporate sentiment.
Sentiment among non-manufacturers was either slightly firmer or unchanged. Large hotels and restaurants benefited from the flux of visitors from overseas who continued taking advantage of the weak yen. Record snowfall in many regions also boosted demand for winter clothing and heaters, which in turn propped up the retail chains.
The government repeated the need to keep a close watch on “fluctuations in the financial and capital markets.” The yen has firmed further to Y142 to the dollar, shedding most of its losses incurred in the second half of 2024. Last month, it had appreciated to around Y149.50 from Y158 in January. The U.S. Federal Reserve remains cautious about cutting interest rates amid sticky services costs and stiff tariffs, which are set to boost import cots and thus overall inflation. The BOJ is expected to continue raising interest rates but only gradually.
The government vowed to “take all possible measures” to cushion the impact of the Trump tariffs. Tokyo sent Economic Revitalization Minister Ryosei Akazawa to Washington this week for talks with U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer.
Last week, President Trump announced a 90-day pause on the latest series of import duties, which put Japan’s 24% across-the-board on hold, but the 10% baseline tariff and a 25% tariff on automobiles, auto parts, steel and aluminum exports to the U.S. are kept in place.
In the April report, the Japanese government estimates that the U.S. tariffs will have a direct impact on mostly manufacturers whose production accounts for about 20% of the gross domestic product. “It is important to keep running the virtuous cycle of higher wages to higher prices involving mostly non-manufacturers that account for 80% (of Japan’s GDP),” it said.
The government repeated that with the Bank of Japan it “will continue to work closely together to conduct flexible policy management in response to economic and price developments.” It expects the BOJ “to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, by conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”
The government continues to view the Chinese economy as “pausing” even though there is an increase in supply thanks to the effects of policy measures. It regards the U.S. economy as “expanding” but also warned that its trade policy is generating “uncertainty.” Eurozone is “picking up” and Germany is struggling. It downgraded its view on India for the first time in 47 months, saying “the pace of economic growth is slowing.” Previously, it had said “the pickup is pausing.”
Key points from the monthly report:
The official view on business sentiment was revised down for the first time in 37 months. It is now “largely flat,” instead of “improving.” The Tankan survey showed the index for confidence among major manufacturers slipped to 12 in the March quarter from 14 in December, posting its first decline in four quarters.
The government maintained its core assessment of private consumption that is “picking up” but changed its wording for the key component that accounts for about 55% of the GDP, saying “the pickup in private consumption is backed by employment and income conditions, although consumer sentiment is in a weak tone.” That was the first change in eight months. Previously, consumption was “picking up while weakness remains in some areas.”
Real household spending posted its first year-on-year drop in three months (the 8th in 12) in February but the decrease was only slight at -0.5%, and it would have risen 1.8% if the boosting impact of the lunar new year in February 2024 were excluded. It was much firmer than the median forecast of a 3.4% slump and followed a slowdown to +0.8% in January from +2.7% in December.
The decline was mainly caused by the volatile factor of home repairs/maintenance, and also in reaction to higher medical and dental bills paid a year earlier. Consumers slashed purchases of vegetables and fruits amid rising costs and shied away from buying appliances that were not in an urgent need for replacement. Real wage growth is falling behind inflation again, keeping households frugal.
The core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, also fell 0.8% on the year after dipping at the same rate the previous month, when overall spending edged up 0.8%.
The government maintained its view on industrial production, which has been “flat.”
Production posted its first rise in four months in February, up 2.3% (revised down from 2.5%), driven by solid demand for equipment for producing semiconductors and flat panel displays as well as that for computer chips. METI’s survey of producers indicated that output would edge up 0.6% in March (a rare case of the same figure after adjustment for the index’s upward bias), led by a continued rise in the output of production machinery, before being nearly flat (+0.1%) in April.
The government kept its assessment of exports after upgrading it for the first time in 18 months in February, saying they are “showing signs of a pickup.”
Japanese export values posted the sixth straight year-on-year rise in March, up 3.9%, after rising 11.4% in February. The increase was led by continued solid demand for automobiles and semiconductor-producing equipment (non-ferrous metals also up) ahead of the Trump administration’s April 2 announcement of “reciprocal” tariffs on imports from many trading partners. Shipments of iron and steel fell, hit by the U.S. tariffs on metals that took effect in mid-March. Mineral fuel exports also dipped.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
“The pickup in private consumption is backed by employment and income conditions, although consumer sentiment is in a weak tone” vs. private consumption is “picking up while weakness remains in some areas” (wording changed for the first time in eight months; upgraded in August 2024; downgraded in February 2024).
Business investment is “showing signs of a pickup” (unchanged; upgraded in March 2024; downgraded in November 2023).
Housing construction is “largely flat” (unchanged; upgraded in August 2024’ downgraded in September 2023).
Public investment is “resilient” (unchanged; upgraded in July 2024; downgraded in October 2024).
Exports are “showing signs of a pickup” (unchanged; upgraded in February 2025; downgraded in July 2024).
Imports are “largely flat” (unchanged; upgraded Oct 2024; downgraded in February 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “improving” vs. “improving as a whole but its pace is moderate” (the first upgrade in 18 months; last upgraded in September 2023; downgraded in December 2024).
Business sentiment is “largely flat” vs. “improving” (the first downgrade in 37 months; upgraded in December 2023; last downgraded in March 2022).
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 September 2024).
Consumer prices are “rising” (unchanged: last changed in January 2024).