(MaceNews) – Japan’s government continued to put on a brave face on the global trade war and politically explosive food price inflation, maintaining its cautiously optimistic domestic economic outlook for the ninth straight month, saying the economy is expected stay on a “modest recovery” track.
In its monthly report for May released Thursday by the Cabinet Office, the government repeated that the economy is “recovering at a moderate pace but confronted by the uncertainty arising from the U.S. trade policy.”
In April, the part about the protectionist high tariff imposition on imports of crucial goods replaced the phrase that “there are some areas where it is pausing.” That wording was adopted in August, when it upgraded its view, citing the effects of wage hikes in fiscal 2024 ending March 2025 and temporary income tax credits.
Compared to their peers in the Group of Seven major economies, Japanese consumers are reeling more under the weight of an above 3% annual inflation rate, which has now pushed a fragile real wage recovery back into a 2% drop. The pressing issue in Japan is that the current price rises are not backed by domestic demand (wage-heavy services price hikes are still subdued) but largely pushed up by higher import costs.
This means that inflation, mostly in food and energy, is not accompanied by sustained and substantial wage growth and that underlying inflation is still below the Bank of Japan’s 2% target.
The national average consumer inflation in Japan is expected to accelerate in two of the three key readings in the April data due at 0830 JST on Friday (2330 GMT/1930 EDT Thursday) after the government halved its heating season utility subsidies in March, the last of the three-month period (bills are paid from February to April). The pace of increase, however, is expected to be moderated by the price-cutting effect of free high school education at a national level that began on April 1, a year after the Tokyo metropolitan government introduced a similar program.
The core reading (excluding fresh food) is forecast to post a 3.4% rise on year, the fastest in 25 months (since 3.4% in April 2023), after its annual rate picked up to 3.2% in March from 3.0% in February to match the rate in January. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is estimated at a 14-month high of 3.0% after having firmed to 2.9% in March from 2.6% previously.
The year-on-year rise in the total CPI is likely to stand at 3.6% after having unexpectedly eased further to 3.6% in March in light of slower gains in fresh food prices and decelerating to 3.7% in February from a two-year high of 4.0% at the start of the year.
Processed food costs remain elevated on the lingering effects of rice shortages, with the prices of rice costing nearly double compared to a year earlier. The government’s attempt to bring down the prices for the staple through rebounds of releasing rice reserves has failed to have much impact.
Rice is still a sensitive topic among many Japanese households that are trimming non-essential spending to make ends meet. Amid voter frustration, Prime Minister Shigeru Ishiba was forced to replace farm minister Taku Eto this week after he made comments a political fundraiser that he had “never had to buy rice” thanks to gifts from supporters.
Looking ahead, the government repeated that “the improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the U.S. trade policy is raising downturn risks to growth.”
“In addition, the effects of continued price increases on private consumption through a downturn in consumer sentiment are also downside risks to the Japanese economy,” it warned.
The government repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”
The government vowed to “take all possible measures” to cushion the impact of the Trump tariffs and retaliatory measures taken by major U.S. trading partners.
President Trump has applied a 90-day pause on the latest series of import duties, which put Japan’s 24% across-the-board on hold, but the 10% baseline tariff and a 25% tariff on automobiles, auto parts, steel and aluminum exports to the U.S. are kept in place, the latter of which are already showing in trade data.
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.”
At its latest meeting on April 30-May 1, the Bank of Japan’s nine-member board voted unanimously to maintain the target for the overnight interest rate at 0.5%, as widely expected, amid high uncertainty over global growth and inflation sparked by stiff Trump tariffs, after having stood pat in March. In January, the panel voted 8 to 1 to raise the policy rate by another 25 basis points to 0.5% in its third hike during the current normalization process that began in March 2024.
The BOJ appears to be still on course for two more 25 basis point rate hikes that would eventually take the overnight interest rate target to 1%. The bank is in the process of normalizing its policy by gradually lifting the rates that had been in a range of zero and slightly negative until March 2024.
The board now expects underlying CPI inflation to settle around the bank’s 2% target in the second half of the projection period (fiscal 2025 through fiscal 2027), which is about six to 12 months later than projected earlier. But Governor Kazuo Ueda told a post-meeting news conference that it “does not necessarily mean that the timing of the next rate hike will be pushed back in the same way.”
Data released last week showed that Japan’s gross domestic product for the January-March quarter posted its first contraction in four quarters, down 0.2% on quarter, or an annualized 0.7%, in payback for a technical jump in net exports in the previous quarter but also hit by flat consumption amid high costs of living and the murky outlook for global growth triggered by the protectionist U.S. trade policy.
The GDP slip followed the 0.6% rise (annualized revised up slightly to 2.4% from 2.2%) in the October-December quarter, when the solid growth was led by a technical rebound in net exports that was caused by a sharper-than-expected slump in imports and masks weak exports and domestic demand. It also came after the U.S. economy recorded its first contraction in three years in Q1, down an annualized 0.3%, shrinking after the 2.4% expansion in Q4, largely due to rush imports ahead of stiff Trump tariffs.
Going forward, Japan’s economic performance in the April-June quarter is expected to remain subdued, likely marking the second straight contraction, as consumers stay frugal amid falling real wages, external demand remains uncertain and firms are still cautious about implementing their solid capex plans amid the global trade war instigated by the Trump administration.
As for overseas economies, the drag from the global trade war prompted the government to downgrade its overall assessment for the first time in 10 months, saying, “The pace of pickup in the world economy has become gradual while it is pausing in some regions and the uncertainty is seen due to the U.S. trade policy.”
It compares to the previous statement, “The world economy is picking up, although it is pausing in some regions and the uncertainty is seen due to the U.S. trade policy.” The last change in wording was made in July 2024, when the view was downgraded for the first time in 18 months.
The government downgraded its assessment of the U.S. economy for the first time in 33 months, saying its expansion is “slowing” instead of simply “expanding,” repeating its warning made last month that its trade policy is generating “uncertainty.” Tokyo continues to view the Chinese economy as “pausing” even though there is an increase in supply thanks to the effects of policy measures.
By contrast, the government upgraded its view on the Eurozone for the first time in 11 months, saying the region is “showing signs of a pickup,” leaving out the part that “it is pausing in some areas.”
Key points from the monthly report:
The government maintained its assessment of private consumption that accounts for about 55% of the GDP, saying it is “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is in a weak tone.”
Real household spending unexpectedly posted its first rise in two months in March, up a solid 2.1% (the fifth in 12), after posting a slight 0.5% dip in February, despite the headwind of elevated costs for food and other necessities amid depressed real wages. The increase was led by higher private university tuition fees (due partly to a sample update), electricity bills (cold weather) and prices for computers (an operation system transfer to Windows 11 from 10 plus replacement demand for units bought during the pandemic lockdowns), which were partly offset by lower dental bills as well declines in some volatile factors, such as home repairs/maintenance and money sent to children studying away from home. It was much stronger than the median forecast of a 0.7% dip. Spending in February would have risen 1.8% if the boosting impact of the Lunar New Year in February 2024 were excluded.
The core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, rose 2.7% on the year after dipping 0.8% the previous month, when overall spending slipped 0.5%.
The government maintained its view on industrial production, which has been “flat.”
In May 30 data, industrial production is forecast to post its first drop in three months in April after a slight 0.2% gain (revised up sharply from -1.1%) in Mach as the impact of the global trade war initiated by President Trump is expected to start showing in export data.
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output would slump 2.5% in April (adjusted for the forecast index’s upward bias), pulled down by declines in electrical/information devices, chemicals and refined petroleum products before rising 3.9% in May, led by a rebound in autos and electrical/information equipment. But some economists expect a deeper decline in April in light of more confusion on the global trade front.
The government kept its assessment of exports after upgrading it for the first time in 18 months in February, saying they are “showing signs of a pickup.”
Japanese export values posted a seventh straight year-on-year rise in April but the global trade war launched by the United States led the pace of increase to decelerate further to 2.2% (vs. consensus +3.1%) from a revised 4.0% in March, 11.4% in February and 7.3% in January. Higher shipments of computer chips, food and drugs were partly offset by declines in automobiles as well as iron and steel, hit by Trump tariffs on imports. Exports of ships also dropped.
Import values slipped back 2.2% (vs. consensus -3.9%) after rebounding a revised 1.8% in March on a 0.7% dip the previous month. The decrease was led by lower purchases of coal, crude oil and aircraft as seen the previous month. The prices for crude oil and other materials have eased on dimmer global growth prospects while a firmer yen on waning U.S. currency safe-haven status has lowered import costs.
The trade balance marked a deficit of ¥115.85 billion (vs. consensus ¥191.30 billion in surplus) for the first shortfall in three months (the eighth in 12 months) following a revised ¥559.43 billion surplus in March and narrowing from a ¥504.69 billion deficit seen in April 2024. The deficit was not entirely unexpected. NLI Institute Chief Economist Taro Saito, who often accurately predicts trade figures, had called for a deficit of ¥140.50 billion, which was at the bottom of the economist forecast range, with the highest being a surplus of ¥343.80 billion.
Exports to the United States, which is the largest market for Japanese exports, dipped 1.8% on year after +3.1% in March, marking their first drop in four months (down for a fifth straight month through December 2024).
Those to the European Union slipped 5.2% (vs. -1.1% the previous month) for the fourth drop in a row while shipments to China fell 0.6% after falling 4.8% in March and marking the first gain in three months in February (vs. +14.1%).
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
“Private consumption is showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is in a weak tone” (unchanged; working changed in April 2024; 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 “showing signs of a pickup” (unchanged; upgraded in February 2025; downgraded in July 2024).
Imports are “showing signs of a pickup” vs. “largely flat” (the first upgrade in six months; last upgraded in November 2024; downgraded in February 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “improving” (unchanged; upgraded in March 2025; downgraded in December 2024).
Business sentiment is “largely flat” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; 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).
