By Max Sato
In its monthly report for August released Wednesday by the Cabinet Office, the government maintained its overview after adding a slightly positive tone last month, saying the economy is “recovering at a moderate pace, although the effects of the U.S. trade policy are seen in some areas.” The official assessment was last upgraded in August 2024 and downgraded six months earlier.
Slightly easing but still potentially debilitating (for both U.S. consumers and their overseas suppliers) import duties imposed by President Trump have prompted the government to downgrade its view on corporate profits, which it says are now marking time, instead of improving.
The uncertainty over both global and domestic demand lingers even in the wake of trade deals between Tokyo and Washington.
The two long-time economic and military allies have agreed to lower the “reciprocal” tariff rate to 15% on most U.S. imports of Japanese goods including automobiles and auto parts (50% on iron and steel), down from Trump’s original plan to slap 25% duties on Japan, but the figure is still much higher than the 2.5% rate imposed by the United States before the second Trump administration.
Looking ahead, the government also repeated the slightly upbeat assessment provided last month, 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 repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”
The cautiously optimistic official assessment follows the preliminary April-June GDP data released earlier this month. Japan’s rickety economy recorded a higher-than-expected 0.3% rise on quarter, or an annualized 1.0%, for the fifth straight quarterly economic growth, recovering from three consecutive quarters of contraction through January-March 2024. External demand turned out to be stronger than forecast with a combination of modest export growth and weak imports reflecting sluggish domestic demand.
The Q2 GDP growth followed a slight 0.1% rise q/q (+0.6% annualized) in January-March, which was revised up from the economy’s first contraction in four quarters with a slight 0.04% dip (-0.2% annualized).
Going forward, Japan’s economic performance in the July-September quarter is expected to remain sluggish as consumers stay frugal amid falling real wages, external demand is marred by trade rows and some firms are wary of implementing their solid capex plans.
Japan’s government vowed to “continue taking all possible measures” to cushion the impact of the Trump tariffs.
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.”
At its July 30-31 meeting, the Bank of Japan’s nine-member board voted unanimously to maintain the target for the overnight interest rate at 0.5% for the fourth straight meeting after hiking it by 25 basis points (0.25 percentage point) in January amid uncertainty over trade rows.
The board said the bank will continue raising rates if growth and inflation evolve in line with its medium-term outlook but it is still in the process of normalizing its monetary policy stance from years of keeping short-term rates near zero percent.
In its quarterly Outlook Report released at the same time, the board left its growth forecasts little changed for fiscal years 2025, 2026 and 2027 (ending in March 2028) while revising up its inflation outlook sharply for the current fiscal year and seeing tame price rises in fiscal 2025 and 2026 as projected in the April report.
The government repeated that the U.S. growth rate is “slowing.” Tokyo continues to view the Chinese economy as “pausing” even though there is an increase in supply thanks to the effects of policy measures.
On the upside, South Korea is “picking up” while Taiwan “recovering,” both their first upgrade in 15 months. By contrast, Tokyo revised down its assessments on the Eurozone and Germany for the first time in 11 months. The pace of the regional pickup seen earlier is “slowing” and the biggest economy in the region is now pausing.
Key points from the monthly report:
The government maintained its assessment of private consumption that accounts for about 55% of the GDP while noting a slightly improvement in confidence, saying, it is “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is slow to recover.”
The increase was partly offset by declines in foodstuffs (the first drop in three months was caused by rising prices of meat, etc.), overseas package tours and gift money (due to simplified weddings and funerals). Spending on air conditioners saw a 13.0% y/y pullback after a 45.6% surge in May, when the unusually early arrival of a heat wave prompted many households to front-run purchases.
The core measure (excluding housing, motor vehicles and remittance) dipped 0.4% on the year after rising 2.5% in May.
The government continues to term industrial production as “flat.”
In the latest data to be released on Aug. 29, Japan’s industrial production is forecast to slip back 1.5% on the month in July after marking its first rise in three months in June with a solid 2.1% gain as the news of Tokyo’s trade accord with Washington appears to have come in a little too late for firms to digest.
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would output would slip 1.0% in July before rising 0.8% in August, led by production machinery as well as iron/steel and non-ferrous metals.
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.” Previously, exports were “showing signs of a pickup.”
Japanese export values fell 2.6%, posting their third straight year-on-year drop in July following decreases of 0.5% in June and 1.7% in May (the first decline in eight months). Japanese carmakers are reducing the prices for U.S. customers to cover high Trump import tariff costs, exerting downward pressures on overall export prices, but the volumes of Japan’s exports to the world remain on an uptrend. The decline in July export values was led by autos, iron/steel and auto parts.
Import values slipped 7.5% after marking an unexpected rise in June (+0.3%) and slumping 7.6% in May. The decrease was driven by lower prices for crude oil, coal and liquefied natural gas.
The trade balance came to a deficit of ¥117.55 billion vs. a downwardly revised ¥152.12 billion surplus in June (the first black ink in three months) and a ¥628.34 billion deficit recorded in July 2024.
Exports to the key U.S. market slumped 11.4% on year, the third straight drop (May -11.0%), hit by autos, drugs and auto parts. Exports to the European Union rose 3.6% for the second straight rise (May +4.9%), led by autos, engines and construction/mining equipment. Shipments to China remain weak, down 4.7%, the fourth straight decline (May -8.8%) on slower demand for non-ferrous metals, chip-making equipment and automobiles.
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, backed by employment and income conditions, although consumer sentiment is slow to recover” (unchanged; 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 “has a weak undertone” in payback for rush starts before tighter clean energy rules took effect on April 1 vs. “is largely flat” (the first downgrade in 23 months; upgraded in August 2024; last downgraded in September 2023).
Public investment is “solid” vs. “resilient” (the first upgrade in 13 months; last upgraded in July 2024; downgraded in October 2024).
Exports are “largely flat” (unchanged; upgraded in February 2025; downgraded in July 2025).
Imports are “showing signs of a pickup” (unchanged; upgraded in May 2025; downgraded in February 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” vs. “improving, although attention should be given to the effects of trade issues” (the first downgrade in eight months; upgraded in March 2025; last downgraded in December 2024).
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 “showing a slower pace of increase” vs. “rising gradually” (wording changed; last changed in November 2024).
Consumer prices are “rising” (unchanged: last changed in November 2024).