Japan outlook Q1 2025
Japan battles weak demand and domestic challenges

Japan’s trade-dependent economy faces a high-stakes poker game in 2025. Its economic report card for Q4 2024 painted a cautious picture, with GDP contracting 0.2% quarter-on-quarter, undoing the modest 0.3% gain from Q3.
With a trade-to-GDP ratio of 40%, global demand is the key for Japan’s economic growth. Weak external demand and lethargic capital spending weighed heavily on the economy. With a slowing global environment and pinched household wallets, Japan faces a steep climb as it steps into 2025.
China’s stimulus offers some upside as it’s Japan’s key trade partner, but US protectionism and Europe’s economic malaise cast long shadows over export prospects.
Weak yen boosts exports
The extended weakness of the Japanese yen continued to make waves. While exporters cheered the yen’s tumble, households felt the sting of pricier imports. The currency’s slump has been a double-edged sword, cutting inflation control efforts while boosting export competitiveness.
December’s trade data offered a mixed bag: exports grew by 2.7% year-on-year, powered by robust demand from China and neighbouring Asian economies. However, imports dipped 4.2%, shrinking the trade deficit to a more manageable ¥108 billion. Asia remains Japan’s trade lifeline, with China alone accounting for 17% of exports.
Private consumption under pressure
Japan’s shoppers are tightening their belts. Household spending slid 1.5% year-on-year in November, the third straight month of declines. Imported inflation and stagnant wages are dampening consumer spirits, leaving confidence levels far below their pre-pandemic highs.
The Bank of Japan's strategy relies on rising wages to boost demand, but progress has been slow. Without a revival in disposable income, Japan's economic engine risks sputtering further.
Sector growth offset by weak investment
Corporate Japan showed a split personality in Q4. Tech and automotive sectors benefitted from the global demand for semiconductors and EV components, while overall business investment fell 0.8%. For SMEs, rising input costs remain a tough pill to swallow, squeezing already thin margins.
The government’s push for green energy and digital transformation offers a glimmer of hope. Yet, without tackling structural issues like labour shortages and flagging productivity, these initiatives may struggle to deliver the desired boost.
BOJ expected to raise rates in 2025
The Bank of Japan is playing it cool, maintaining its dovish stance. It decided to keep its short-term policy rate at 0.25% in December 2024 and gave only few hints about its future moves. But the market buzz suggests change could be brewing in 2025.
The BOJ is expected to raise interest rates two or three times during 2025, potentially reaching 1% by the end of year. However, further rate hikes would require the economy continuing to improve.
Governor Kazuo Ueda has made it clear: wage growth is the key to any policy pivot. The policymakers of BOJ hope the wages growth will keep increasing steadily, encouraging consumption.
Inflation remains stubbornly above the BOJ’s 2% target, fuelled by import costs. A rate hike could stabilise the yen, but it risks derailing already fragile consumption. The BOJ’s balancing act is akin to walking a tightrope over a windy canyon.