Japan’s Government Keeps Modest Economic Recovery Outlook as Trump Takes Office with No Clear Date for Stiff Tariffs on Imports from Canada, Mexico, China

By Max Sato

(MaceNews) – Japan’s government maintained its overall assessment that the economy will stay on a “modest recovery” track as elevated costs for food and other essentials have eroded real wages and firms and markets brace for Trump tariffs on U.S. imports from its close trading partners.

In its monthly report for January released Thursday by the Cabinet Office, the government said the economy is “recovering at a moderate pace, although there are some areas where it is pausing.” The wording hasn’t changed since August, when it upgraded its view, citing the effects of wage hikes in fiscal 2024 ending March 2025 and temporary income tax credits.

Looking ahead, “the economy is expected to continue recovering at a moderate pace with the improving employment and income conditions, supported by the effects of the policies.” The government has resumed three-month utility subsidies to help lower electricity and natural gas bills during the winter heating season from January to March (bills paid from February to April). It is also providing cash handouts to low-income families.

The government continued to warn against downside risks from slower growth in other countries, “including the effects of continued high interest rate levels in the U.S. and Europe and the lingering stagnation of the real estate market in China.”

It also repeated the need to keep a close watch on “the effects of price increases, future policy trends in the U.S., the situation in the Middle East and fluctuations in the financial and capital markets.” The yen remains depressed against the dollar on market expectations that the U.S. Federal Reserve will keep its rate cut gunpowder dry amid resilient growth and lingering core inflation while the Bank of Japan is raising rates only gradually. The dollar hovered over Y156, lower than Y158 at the start of the year but well above Y148 seen about a year ago.

Financial markets were relatively calm this week as President Donald Trump did not impose heavy import tariffs on the first day of his administration as he had threatened to do last year. He didn’t bring up the issue during his inaugural speech Monday but later said his plan to levy 25% tariffs on Mexico and Canada are likely to go into effect on Feb. 1

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 Bank of Japan’s nine-member board is widely expected to decide in a majority vote to raise the policy interest rate by another 25 basis points to 0.5% at its meeting on Jan. 23-24 after leaving it steady at 0.25% in the last three meetings. The bank raised the key rate to the current level from a range of 0% to 0.1% in July and conducted its first rate hike in 17 years in March 2024, when it also ended its controversial seven-year-old yield curve control framework.

This is part of the bank’s policy normalization process following a decade of large-scale monetary easing aimed at reflating the economy. It is expected to lift the overnight rate to around 1% by the end of 2025 or early 2026.

As for overseas economies, the government maintained its overall assessment, saying, “The world economy is picking up, although it is pausing in some regions.”

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” while noting that both the Eurozone and the UK economy are “picking up” but that Germany is struggling.

Key points from the monthly report:

The government maintained its assessment of private consumption, which accounts for about 55% of gross domestic product, saying it is “picking up while weakness remains in some areas.”

Real household spending posted a fourth straight decline in November, down a slight 0.4% on year (more or less in line with the consensus call of -0.6%), as consumers remain frugal amid high costs for food and other necessities and a resumed drop in real wages. The decrease was caused by waning demand for air conditioners, washers and golf fees as cold weather replaced the unusually long heat wave. It was partly offset by gains in volatile factors of home repairs/maintenance and university tuition fees as well as a continued rise in eating out (drinks, sushi).

Total monthly average cash earnings per regular employee in Japan posted their 35th straight year-on-year rise, up a nominal 3.0% in November, after rising a 2.2% rise in October. Base wages rose 2.7% on year, up from 2.5% the previous month. However, real average wages slipped 0.3% for the fourth consecutive drop following a short-lived slight pickup that lasted for only two months.

The government maintained its view on industrial production.

Production posted its first drop in three months in November, down 2.2% on the month, after increases of 2.8% in October and 1.6% in September that followed a 3.3% slump in August, revised data released earlier this month by the Ministry of Economy, Trade and Industry showed. The decrease was led by production machinery for semiconductors and flat-screen panels as well as vehicles (passenger cars and trucks) after recent gains.

METI’s survey of producers indicated that output would dip 0.3% in December despite an expected rise in production and general machinery before rebounding 1.3% in January on vehicles and semiconductors.

The government also maintained its assessment of exports, saying they are “largely flat” based on trade data through November.

Japanese export values rose 2.8% on year in December to a record high ¥9.91 trillion, posting their third straight year-on-year rise and leading to an unexpected trade surplus. The increase was led by solid demand for semiconductor-producing equipment, computer chips and food, which offset lower shipments of automobiles, ships and construction/mining equipment. Export volumes were down 2.6% for the first drop in two months amid struggling economic recovery in China and parts of Europe.

Other details:

The government’s assessment of key components of the economy in the monthly economic report:

Private consumption is “picking up while weakness remains in some areas” (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 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 “largely flat” (unchanged; upgraded in August 2023; downgraded in July 2024).

Imports are “showing signs of a pickup” (unchanged; upgraded Oct 2024; downgraded in March 2024).

Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).

Corporate profits are “improving as a whole but its pace is moderate” (unchanged; upgraded in September 2023; downgraded in December 2024).

Business sentiment is “improving” (unchanged; upgraded in December 2023; downgraded in March 2022).

The pace of increase in bankruptcies is “largely flat” vs. “slowing” (the first upgrade in four months; last upgraded in September 2024; 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).