Image Credits - Nli research
Japan has announced a downward revision of its economic growth forecast for the current fiscal year, reflecting mounting concerns over a global economic slowdown and persistent domestic challenges. The government’s latest projections indicate a more cautious outlook, influenced by various external and internal factors that are expected to impede economic performance.
The Cabinet Office of Japan now predicts that the economy will expand by 1.0% in the fiscal year ending March 2025, down from the previous estimate of 1.3%. This adjustment underscores the increasing headwinds facing Japan, including ongoing trade tensions, sluggish global demand, and the lingering effects of the COVID-19 pandemic on supply chains and consumer behaviour.
One of the primary drivers behind the reduced growth forecast is the slowdown in global economic activity. Major economies, including China and the United States, are experiencing deceleration, which has a ripple effect on Japan’s export-dependent economy. The downturn in international trade volumes has adversely affected Japanese manufacturers, leading to lower production and reduced investment in new projects.
Additionally, persistent trade tensions, particularly between the U.S. and China, have created an uncertain environment for international commerce. These geopolitical frictions have disrupted supply chains and increased costs for Japanese companies, further dampening the outlook for economic growth.
Domestically, Japan continues to grapple with several structural challenges. The country’s ageing population and declining birth rate pose significant long-term issues for economic sustainability. A shrinking workforce leads to lower productivity and increased social welfare costs, placing additional strain on the economy. Despite government efforts to encourage higher participation rates among women and older workers, these measures have yet to fully offset the demographic decline.
Consumer spending, a critical component of economic growth, remains weak. Despite improvements in employment rates, wage growth has been sluggish, limiting disposable income and dampening consumer confidence. The ongoing impacts of the COVID-19 pandemic, including sporadic outbreaks and restrictions, have also contributed to cautious consumer behaviour and suppressed spending levels.
The government’s fiscal and monetary policies have provided some support to the economy. However, with public debt levels already among the highest in the world, there is limited room for further fiscal stimulus. The Bank of Japan’s ultra-loose monetary policy, while helping to maintain low borrowing costs, has not been sufficient to spur significant economic growth.
In response to the revised forecast, the Japanese government has reiterated its commitment to structural reforms and measures to boost economic resilience. These include initiatives to enhance productivity, promote innovation, and attract foreign investment. Additionally, policies aimed at addressing demographic challenges and improving the business environment are expected to play a crucial role in supporting long-term growth.