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Japan’s economy entered the new year with positive momentum. Wages are rising, private consumption shows signs of growth, and the deflationary era seems to have ended. This makes Japan’s outlook for 2025 optimistic.
“The economic rebound is being driven by a shift from deflation to reflation, marking a dramatic transformation after years of sluggish growth,” says Stephen Way, Head of Global & Emerging Markets Equities at AGF Investments. As he explains, deflation stifled wage growth, consumer spending and overall economic activity over the past two decades. “We believe the current environment is markedly different, as rising wages, increased inflation expectations and improved corporate pricing power support a more robust economic backdrop,” he adds.
AXA Investment Manager’s Gabriella Dickens also sees the end of deflation in Japan “with a virtuous wage/price spiral appearing to take hold”. “We see scope for a structural rise in wages over the coming years,” the G7 Economist – Macro Research says. “Dwindling labour supply amid an ageing population should increase bargaining power, while rising inflation expectations among households and businesses should pave the way for larger pay rises in the coming years. We look for a rise in base pay of around 3% in 2025 and 2026,” Dickens adds.
However, economic challenges remain, including labour shortages, straining production and public finances. Global trade uncertainties and the Bank of Japan’s monetary tightening pose risks to exports, consumer spending, and investments.
Japan Outlook: Equities
In 2024, the Nikkei 225 reached its highest level since 1989, and the Japanese equity market is expected to maintain its current robust performance. However, the stock market is sensitive to macroeconomic conditions in the US as well as the Bank of Japan’s monetary policy, cautions Tomochika Kitaoka, Chief Japan Equity Strategist at Nomura. So, the market’s reaction to tariffs being imposed by the US is one concern for 2025.
However, according to Nomura, the impact of Trump’s tariffs on Japanese corporate earnings is unlikely to be substantial.
Sumitomo Mitsui Trust Asset Management (SuMi Trust) sees the equity market’s positive momentum bolstered by “expectations for a soft landing for the US economy, improving corporate earnings in the service sector, and a positive outlook for shareholder return programs by Japanese companies”.
“The key to whether corporate earnings remain steady will be if the yen can maintain the assumed exchange rate of 145 yen to the dollar used by many Japanese companies in their earnings forecasts,” says Hiroyuki Ueno, Chief Strategist at SuMi Trust.
The yen is at historically weak levels but has shown some signs of resilience since June 2024. SuMi Trust expects the Japanese currency to likely move in response to Japanese and US monetary policy developments.
“While the BOJ’s plans will take into account the economy, prices, and the general finance environment, we expect that they will continue to raise rates as planned since real interest rates are currently at a low level,” says Ueno.
Pictet Asset Management believes the yen will be the major beneficiary of the dollar’s long-term decline and will appreciate next year. “The Japanese economy is set to accelerate while the Bank of Japan is one of the few central banks that will hike interest rates. According to our model, the yen is around 20% below its fair value,” says Pictet in their outlook for 2025.
“We believe the biggest risk for Japan in 2025 is that following decades-long stagnation, its moderate economic recovery could face a slowdown, denting business and investor sentiment,” opines Junichi Inoue, Head of Japanese Equities at Janus Henderson Investors.
He notes that the earnings growth rate for the Japanese market is anticipated to be in the high-single digits, a target that appears achievable. However, Inoue highlighted that while the financial sector is expected to drive this growth, the manufacturing sector might experience a more pronounced slowdown, potentially impacting profits if revenue growth falters, as cost reductions in this sector are not easily implemented.
