By Max Sato
In its monthly report for June released Wednesday by the Cabinet Office, less than three weeks after the prior report, the government repeated that the economy is “recovering at a moderate pace but confronted by the uncertainty arising from the U.S. trade policy.”
Tokyo appears to have brought forward the release of its monthly report by about two weeks so that it could officially update the status of Japan’s economy before the leaders of the Group of Seven major nations gather for their annual summit at Kananaskis in the Canadian province of Alberta from June 15 to June 17.
On a bright note, wage hikes announced by major firms for fiscal 2025 topped a key 5% mark for the second year in a row, estimated at 5.26% in weighted average and the highest rate in 34 years (base wages are up 3.71%), according to the latest count by the Japanese Trade Union Confederation (RENGO) released on June 6. That is up from 5.08% tallied a year ago, which was a 33-year high (base wages growth was 3.54%).
But the pace of wage increase has lagged behind a spike in the costs for food, energy and other necessities as firms continue passing higher import and production costs onto consumers, after years of hesitation for fear of losing market share. Real wages showed a brief two-month period of a slight year-on-year rise, each in the middle and at the end of 2024, propped up by summer and winter bonus payments, but now posted a fourth consecutive decline around 2% in the latest data for April.
Bank of Japan policymakers are concerned that underlying inflation remains below their 2% target after the country has trudged up from the depth of deflation only a few years ago. The above 3% consumer inflation this year is not backed by sustained domestic demand but pushed up by higher costs for materials, reflecting higher import costs and in the absence of a substantial and sustained improvement for service providers, particularly caregivers and day care workers.
Looking ahead, the government repeated that “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.”
“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 government vowed to “take all possible measures” to cushion the impact of the Trump tariffs and retaliatory measures taken by major U.S. trading partners.
President Trump initially slapped 25% tariffs on Canadian and Mexican imports to the U.S. and an additional 10% on China over illegal immigration and drug trafficking for which he blames those countries. The duties on imports from China were jacked up to 145% in April, triggering a 125% Chinese levy on some U.S. goods. But Washington and Beijing have suspended all but 10% of their tariffs for 90 days, starting on May 14. They have cancelled other retaliatory levies, lowering U.S. tariffs on Chinese imports to 30% and Chinese tariffs on U.S. imports to 10%.
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 next policy meeting on June 16-17, the Bank of Japan’s nine-member board is expected to remain cautious amid uncertainty over the impact of trade conflicts on growth and inflation, leaving the bank’s benchmark policy rate unchanged.
Previously, on April 30-May 1, the board voted unanimously to maintain the target for the overnight interest rate at 0.5% amid high uncertainty sparked by stiff Trump tariffs, after having stood pat in March. In January, the panel voted 8 to 1 to raise the policy rate by another 25 basis points to 0.5% in its third hike during the current normalization process that began in March 2024. The next policy meeting is scheduled for June 16-17.
The BOJ appears to be still on course for two more 25 basis point rate hikes that would eventually take the overnight interest rate target to 1%. The bank is in the process of normalizing its policy by gradually lifting the rates that had been in a range of zero and slightly negative until March 2024.
The government notes the U.S. growth rate is “slowing” after downgrading its assessment for the first time in 33 months last month. Tokyo continues to view the Chinese economy as “pausing” even though there is an increase in supply thanks to the effects of policy measures. The Eurozone is “showing signs of a pickup” after the official assessment was upgraded for the first time in 11 months in May.
Key points from the monthly report:
The second reading of Japan’s GDP data confirmed that the wobbly domestic economy posted its first contraction in four quarters in the January-March period, but the decline was smaller than previously believed as private consumption was slightly better than being flat and the buildup in private-sector inventories was much larger than initially calculated. The Q1 drop was revised up to be -0.04% (officially -0.0%), or an annualized -0.2%, from the initial estimate of -0.2% (-0.7% annualized).
The preliminary Q1 GDP data released last month showed the slump was in payback for a technical jump in net exports in the previous quarter. It was also due to flat consumption amid high costs of living and the uncertainty over global growth and inflation triggered by the protectionist U.S. trade policy.
Looking ahead, Japan’s economic performance in the April-June quarter is expected to remain subdued as consumers stay frugal amid falling real wages, external demand remains uncertain and firms are still cautious about implementing their solid capex plans amid the global trade war instigated by the Trump administration. Earlier, some economists had projected a second straight contraction in Q2 but there are indications in major economies that the full impact of the trade conflicts may appear in Q3, instead of Q2 when U.S.-China trade row appears to have eased, at least temporarily.
The government maintained its assessment of private consumption that accounts for about 55% of the GDP, saying it is “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is in a weak tone.”
Real household spending was nearly flat in April, down a slight 0.1% on year, on lower costs for funerals, funds sent to students studying away from home and gift money. It followed an unexpected gain (+2.1%) in March and a 0.5% dip in February (+1.8% if the boosting impact of the Lunar New Year in February 2024 was excluded).
The April dip was mostly offset by higher expenditures on private middle school tuition fees and home facilities as well as auto insurance premiums and a rebound in purchases of vehicles from a slump in early parts of 2024 when the Toyota Motor group suspended output and shipments over safety inspection scandals. Spending on foodstuffs posted its first y/y gain in eight months as an earlier surge in fresh vegetable prices had eased.
The core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, also dipped 0.1% on the year in April after rising 2.7% the previous month, when overall spending rose 2.1%.
The government maintained its view on industrial production, which has been “flat.”
Industrial production posted its first drop in three months in April, down 0.9 after a slight 0.2% gain (revised up sharply from -1.1%) in Mach as some effects of the global trade war initiated by President Trump are showing in sluggish export data. The decrease was led by lower output of production machinery (equipment for making flat screen panels, textile and microchips), aircraft parts and metals (bridges, aluminum cans for beverages, etc.)
The monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rebound 5.2% in May, led by production machinery, electric and telecom equipment and vehicles, before slipping back 3.4% in June due to expected pullbacks in vehicles and production machinery.
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 a seventh straight year-on-year rise in April but the global trade war launched by the United States led the pace of increase to decelerate further to 2.0% from a revised 4.0% in March, 11.4% in February and 7.3% in January. Higher shipments of computer chips, food and drugs were partly offset by declines in automobiles as well as iron and steel, hit by Trump tariffs on imports. Exports of ships also dropped.
Import values slipped back 2.2% after rebounding a revised 1.8% in March on a 0.7% dip the previous month. The decrease was led by lower purchases of coal, crude oil and aircraft as seen the previous month. The prices for crude oil and other materials have eased on dimmer global growth prospects while a firmer yen on waning U.S. currency safe-haven status has lowered import costs.
The trade balance marked a deficit of a revised ¥115.63 billion for the first shortfall in three months (the eighth in 12 months) following a revised ¥559.43 billion surplus in March and narrowing from a ¥504.69 billion deficit seen in April 2024.
Exports to the United States, which is the largest market for Japanese exports, dipped 1.8% on year after +3.1% in March, marking their first drop in four months (down for a fifth straight month through December 2024). Those to the European Union slipped 5.2% (vs. -1.1% the previous month) for the fourth drop in a row while shipments to China fell 0.6% after falling 4.8% in March and marking the first gain in three months in February (vs. +14.1%).
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 in a weak tone” (unchanged; working changed in April 2024; 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 “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 “improving, although attention should be given to the effects of trade issues” (unchanged but added the latter part; upgraded in March 2025; 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 “rising gradually” (unchanged; last changed in September 2024).
Consumer prices are “rising” (unchanged: last changed in January 2024).