NLI Research: 2024/2025 Economic Outlook
This “2024/2025 Economic Outlook (May 2024)”, authored by Taro Saito, the Economic Research Director at the NLI Research Institute, and published in mid-May, delivers a comprehensive analysis of the Japanese economy, projecting key economic indicators and outlining the contributing factors behind these forecasts.
Real GDP Growth: Shifting Towards Domestic Demand
The report predicts a modest Real GDP growth of 0.8% in fiscal year 2024, followed by a slightly improved 1.1% in 2025. A significant observation is the shift towards domestically driven growth. While the first quarter of 2024 saw a contraction due to persistent inflation and disruptions in the automobile industry, the rest of the year is expected to witness a rebound.
This turnaround is attributed to a combination of factors, including pent-up demand in the automobile sector, the positive impact of income and resident tax cuts, and continued strength in business investment. Notably, the report highlights that while external demand has supported growth recently, going forward, it will be domestic demand, particularly consumer spending and business investment, that will drive economic expansion.
Inflation: The Two Sides of Rising Prices
Inflation remains a concern, with core CPI projected to be at 2.5% in 2024 and 1.8% in 2025. While the report acknowledges the negative impact of the weak yen and sustained high crude oil prices on consumer purchasing power, it also delves into the nuances of this inflationary pressure.
On the one hand, businesses have been able to pass on increased import costs, leading to robust corporate profits. On the other hand, households are facing squeezed real incomes due to higher prices for everyday goods and services. The report expects the inflationary impact of the weak yen and high energy prices to ease but emphasizes that service price inflation will likely accelerate, driven by the significant wage increases secured in the 2024 spring wage negotiations.
Wages and Consumer Spending: A Delicate Balance
A key development highlighted in the report is the outcome of the 2024 spring wage negotiations. Japan witnessed the most substantial wage hikes in over three decades, a development expected to bolster consumer spending. The report predicts that nominal wages will continue to rise, ultimately leading to positive real wage growth by late 2024.
This projected rise in real wages is crucial as the report acknowledges that with household savings rates already low, it is the growth in real disposable income that will determine the strength of the recovery in consumer spending. The report anticipates that while private consumption declined in 2023, it will rebound in 2024 and 2025, fueled by a combination of income tax cuts and real wage gains.
Business Investment: Reasons for Optimism
Despite some recent softness, the report presents an optimistic outlook for business investment. It forecasts healthy growth of 2.4% in 2024 and 2.9% in 2025. This positive assessment is underpinned by several factors, including high corporate profitability, ongoing efforts to address labor shortages through automation and technology adoption, and robust demand for digitalization-related investments.
Furthermore, the report highlights a shift in business sentiment, with businesses expressing greater optimism about both the general economic outlook and their specific industry prospects. This improved sentiment, coupled with strong corporate balance sheets, suggests that Japanese businesses are well-positioned to increase investment in the coming years.
Navigating Uncertainty: A Balancing Act
In conclusion, the “2024・2025 Economic Outlook” presents a cautiously optimistic view of the Japanese economy. It anticipates a shift towards a more domestically driven growth model, fueled by rising wages, increased consumer spending, and strong business investment. However, challenges remain, including navigating persistent inflationary pressures, managing the impact of a weak yen, and addressing global economic uncertainties.
The report emphasizes that successfully managing these challenges will be critical for Japan to achieve sustainable and inclusive economic growth in the years to come. This report serves as a valuable tool for anyone seeking to understand the complexities of the Japanese economy and anticipate its future trajectory.
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