Japan Macro Outlook 2025

Japan is headed towards a normal economy with three types of hikes

In 2024, Japan saw seven areas of improvements in its economy. The market saw three types of hikes – a third year of price hikes, second year of wage hikes, and the start of interest rate hikes. In addition, Japan also saw increased software investment and labor mobility, strengthened corporate governance, and a diversification of household financial assets. These are all signals that Japan is headed towards a normal economy, Kyohei Morita, Nomura’s Chief Japan Economist, said at the Nomura Investment Forum in Tokyo on December 3.

In 2025, Japan is expected to continue with its trio of hikes. Its economy has been recovering well, with companies including small and medium-sized enterprises planning for capital expenditure. As these plans turn into actual capex, the economy will likely continue to recover. Reduced labor dependence and increased investments into software have also led to improved labor productivity among Japanese companies. More companies are also facing a rise in interest rates on loans following the Bank of Japan’s rate hike in July.

Real private consumption had been stagnant since mid-2023, but has been on a gradual increase since the beginning of 2024. This could pick up more if base pay growth rises to above 3% each year from now to 2026, as we expect. Wage hikes are also becoming more synchronous among companies. As wage hike demands are met, the relationship between wages and prices will likely form a virtuous cycle. The Bank of Japan regularly references this cycle when managing monetary policy.

In the near-term, Nomura forecasts three more rate hikes: one in December 2024, and one each in April and July 2025, taking the policy rate to 1%.

The Japanese yen is set to outperform under Trump’s second presidency

The Japanese yen is still at historically weak levels, but since the end of June, it has shown signs of resilience, said Yujiro Goto, Head of FX Strategy, Japan. The Japanese yen is the second-best performer among major currencies in the second half of 2024 and this is partially because of the adjustment of carry trades which were built up in the first half of this year.

Although market expectations for BOJ rate hikes are rising, there is room for further increases, which will support the yen. Inflationary pressures on domestic prices are increasing due to yen depreciation. Service prices, which are usually not tradeable, are now responding to the yen weakness because foreign tourists are travelling more into Japan, with hotels and restaurants able to increase prices easily. Since services are powered by labor, these service companies can also increase wages more aggressively. There is now a positive feedback loop between wages and domestic prices, which is a good condition for the Bank of Japan to continue normalizing its monetary policy.

Looking ahead into Donald Trump’s second term as president of the United States, the US dollar strength against the Japanese yen should be limited. The conditions now versus 2016, when Trump first took office, are quite different. Compared to 2016, the Japanese yen is already trading more resiliently. Japan and the US also signed a trade agreement in 2019 during the first term of the Trump administration. As the Bank of Japan continues to pursue rate hikes, the yen is expected to appreciate. From early spring to summer next year, JPY strength is expected to become more pronounced against the euro and Chinese renminbi.

Japanese companies to see more profit from price hikes and increased sales

Following a strong year in Japanese equities, signs of pessimism started to show in April, August and September of 2024, triggered by the US economy and the Bank of Japan’s surprise rate hike in July. The Japanese stock market is sensitive to macroeconomic conditions in the US as well as the Bank of Japan’s monetary policy, said Tomochika Kitaoka, Chief Japan Equity Strategist at Nomura.

A concern in 2025 is the market reaction to tariffs being imposed by the US. Between 2017 to 2020, during the first Trump presidency, when there were tariff events or US-China tensions, there was downward pressure on most global stock indices, but Japanese and US stock indices recovered gradually. Japan is likely to maintain its status as a key partner for the US. At the moment, the impact of Trumps tariffs on Japanese corporate earnings is unlikely to be substantial.

Zooming in on corporate earnings, B2B businesses such as construction, IT and software are enjoying increased profits stemming from price hikes. FX has also been helpful in boosting corporate profits by attracting higher purchase volumes. Both volume and price hikes will continue to support corporate earnings, though a modest appreciation of the Japanese yen may happen next year. Any cost increase will also likely depress earnings, especially in the retail and food sectors.

For more on our 2025 Japan outlook, view the session replay here (requires client login).