Japan’s Government Sticks to Modest Economic Recovery Outlook as Firms Tiding Over Trump Tariff Storms, Inflation Drifting Lower on Easing Food, Energy Costs

–PM Takaichi Quiet on BOJ’s Unwinding of Stimulus; Mainichi Says She Showed Reluctance to Further Rate Hikes in Recent Meeting with Governor Ueda

–Government Nominates Academic Types with Possible Reflationary Bias to Replace Two Outgoing BOJ Board Members

By Max Sato

(MaceNews) – Japan’s government continues to predict a modest economic recovery, noting that corporate earnings are solid despite the drag from the protective U.S. trade policy and that inflation is slowing to around the Bank of Japan’s 2% target amid falling energy and easing food prices.

In its monthly report for February released Wednesday by the Cabinet Office, the government basically maintained its overall assessment, saying the economy is “recovering at a moderate pace, although the effects of the U.S. trade policy remain.” It simply left out the part about the negative impact of stiff tariffs on the auto industry. The official assessment was last upgraded in August 2024, following a downgrade in February that year.

As if to calm the financial markets, Prime Minister Sanae Takaichi has been careful about her public remarks on what she thinks the Bank of Japan should do, repeating the official line that she expects an “appropriate monetary policy” from the bank but also adding her wish that the bank should seek its price stability target of 2% “that accompanies higher wages, not higher costs.”

Some market participants had speculated that Takaichi would urge BOJ Governor Kazuo Ueda to slow the pace of the bank’s already gradual pace of interest rate hikes as part of the process to unwind excess monetary stimulus from decade-long easing launched in 2013 by Ueda’s predecessor Haruhiko Kuroda, a former top Finance Ministry official who served two five-year terms to pursue his goal of reflating the economy by flooding the banking system with cash.  

The Mainichi Shimbun reported on Tuesday that Takaichi “showed reluctance” to further rate hikes at a routine 15-minute meeting with Ueda on Feb. 16, without quoting specific sources. One source told the daily that the prime minister’s tone was “tougher” than at their previous brief meeting in November.

The government on Wednesday nominated two economics professors with a possible reflationary bias to replace two outgoing members of the BOJ’s nine-member board, news reports said. The news helped push up Japanese stock prices higher and dented the yen in a knee jerk reaction on expectations that Takaichi’s pick of the two members, if approved by hung parliament, would slow the pace of the BOJ’s rate hikes.

Junichiro Asada, 71, at Chuo University would replace Asahi Noguchi, 67, formerly with Senshu University, whose five-year term ends on March 31. Aoyama Gakuin University professor Ayano Sato, 57, who teaches international finances and macroeconomics, would fill the gap to be left open by Junko Nakagawa, 60, a former Nomura Securities executive, who is set to retire on June 29.

Even if those two candidates are approved by the Diet (there is a slight possibility of being rejected by the upper house where the opposition has a majority), they are unlikely to shift the course of policy normalization under Governor Ueda who took office in April 2023 and embarked on raising rates in March 2024.

At its Dec. 18-19 meeting, the BOJ board decided unanimously to raise the target for the overnight interest rate by 25 basis points to a 30-year high of 0.75%, pointing to lingering but reduced uncertainties over U.S. trade rows and growing expectations that firms will continue raising wages into fiscal 2026 staring in April.

The normalization process began in March 2024, when Ueda led the board to conduct its first rate hike in 17 years and end 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%. It was followed by another 25-baiss point hike to 0.5% in an 8 to 1 vote in January 2025. Shortly afterwards, U.S. President Donald Trump launched a trade war by unilaterally imposing stiff tariffs on imports from many economies, forcing the BOJ board to stay put.

BOJ policymakers have said they are still adjusting the policy interest rate toward a level considered more neutral to economic activity. After the bank’s latest action to raise the target for the overnight rate to 0.75%, Governo Ueda told reporters that it was “still slightly below the lower end of the estimated neutral rate.”

Last week, International Monetary Fund senior economist Rahul Anand told reporters that the BOJ was expected to increase its policy rate to 1.5% through two hikes this year and one next year, each at a gradual pace of 25 basis points (0.25 percentage point).

On monetary policy, the government repeated its long-held promise 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 also repeated its slogan to build a “strong Japanese economy,” mainly by focusing fiscal spending on growth areas including artificial intelligence, semiconductors, shipbuilding, aerospace, ocean and defense among other industries, and also by seeking stable inflation led by sustained wage hikes, instead of being pushed up by higher import and production costs.

Those goals reflect the idea of a “proactive” but “responsible” fiscal policy stance aimed at investing in developing resources and capacity that can enhance Japan’s economic security and independence. It was first launched by Prime Minister Takaichi when she took office in October. She was re-elected in parliament this month after leading the ruling Liberal Democratic Party to a landslide win in the lower house, ensuring a stable administration, although the ruling coalition lacks a majority in the upper house.

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.”

The latest data showed that Japan’s economic growth in the final quarter of 2025 was nearly flat, up just 0.1% on quarter (0.053% to be more precise), or 0.2% (0.21%) annualized, coming in much weaker than expected as a rebound in business investment turned out to be tepid, public works spending fell more sharply than estimated and stiff U.S. tariffs choked exports of autos, metals and computer chips.

Private consumption, which accounts for about 55% of the GDP, remains sluggish in the face of elevated costs for daily necessities and falling real wages, with its resilience fizzling out toward the end of the year when bad winter weather hampered economic activity. The Q4 growth barely made up for the degree of the economy’s first contraction in six quarters in Q3, when it shrank a downwardly revised 0.7% q/q (2.6% annualized).

Domestic demand made virtually no contribution (+0.04 percentage point) to total domestic output, far below the positive 0.4 point anticipated by economists, while external demand as measured by net exports (exports minus imports) failed to lift the Q4 GDP very much, providing zero contribution (+0.02 point). Private consumption added just 0.1 (0.06) point and capex also disappointed with zero contribution (+0.04 point). Exports suffered a second consecutive q/q drop, hit by lower shipments of autos, computer chips and ships, but the pace of decline decelerated to -0.3% in Q4 from -1.4% in Q3, indicating easing effects of Trump tariffs. Imports also dipped 0.3% on quarter (computers, copper, autos were down).

Looking ahead, economists expect the Q1 GDP to grow at around 1.5% annualized, led by resilient consumer spending amid easing inflation and solid business investment plans to address labor shortages and despite sluggish exports.

As for overseas economies, the government maintained its view after downgrading it for the first time in eight months last month in the face of a renewed threat from President 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.

“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 government said.

The U.S. economy is “expanding moderately” despite uncertainties, the government said, keeping its assessment of the world’s biggest economy that has shown resilience. It maintained its view that the Eurozone is “showing signs of a pickup.” Tokyo sees China as “slowing gradually.” The official view on the world’s second-largest economy was downgraded for the first time in 18 months in the January report.

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 average household spending posted its first year-on-year drop in two months in December, down 2.6%, in payback for the previous month’s jump in automobile purchases as well as a drop in another fluctuating item of home maintenance and repairs, but even the core measure of expenditures (excluding housing, motor vehicles and remittance) fell 1.5%, indicating that consumers remain frugal. The decrease followed an unexpected 2.9% rebound in November, when a routine shuffle of household samples revved up vehicle purchases. 

For a clue to overall economic health, the consumption trend index for all households showed a real 3.2% plunge on quarter in the October-December period after rebounding 1.1% in July-September and posting modest drops in the previous four quarters. This indicates that private consumption is resilient in the face of elevated costs of daily necessities but remains sluggish.

Looking at the whole of 2025, real average expenditures by households with two or more people rebounded a modest 0.9% on the year, marking the first gain in three years vs. -1.1% in 2024, -2.6% in 2023, +1.2% in 2022, +0.7% in 2021 and -5.3% in 2020.

In the bigger picture, elevated costs of living are keeping consumers frugal, limiting growth in overall consumption. Spending on foodstuffs and clothing dipped in December after recent gains. Many households also continue 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 more affordable mobile communications plans.

The government continues to term industrial production as “flat.”

Japan’s industrial production is projected to rebound a sharp 5.3% on the month in January for the first rise in three months after being nearly flat with a 0.1% slip in December as the impact of stiff Trump tariffs on automobiles and metals emerged more in the final quarter of 2025.

The expected sharp increase reflects rush exports of computer chips, non-ferrous metals and plastics ahead of the holidays in China and some other Asian countries around the Feb. 17 Lunar New Year, as seen in January trade data released last week.

The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would surge 7.2% on the month in January, led by a rebound in transport equipment, before falling back 4.3% in February due to a pullback in autos.

The government maintained its assessment of exports, saying they are “largely flat.”

Trade data released last week showed Japan’s export values posted the fifth straight rise on year in January, up an impressive 16.8% (consensus +11.9%), but it was largely due to rush shipments ahead of the Lunar New Year holidays from Feb. 16 until Feb. 23 in mainland China and the amount was not so impressive ¥9.19 trillion following a record high ¥10.41 trillion in December (+5.1%). The Lunar New Year fell on Jan. 29 last year, when Japanese exports slowed to ¥7.87 trillion. However, exports have also been showing some resilience, weathering the drag from U.S. trade rows and riding the wave of recovering demand from Europe and Asia. The increase was driven by computer chips, non-ferrous metals and plastics, as largely seen in recent months.

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” (unchanged; 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 “showing signs of improvement despite the effects of the U.S. trade policy” vs. “improvement in corporate profits are pausing among the auto industry among others in the face of the effects of the U.S. trade policy” (the first upgrade in 11 months; last 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 “showing a slower pace of increase” vs. “rising” (wording changed: last changed in November 2024).