The Japanese economy has developed remarkably well in the first half of 2025. Now, somewhat lower economic growth rates are expected.

In the second quarter of 2025, Japan’s economy grew 0.3% (annualized 1.0%) compared to the first quarter. Export growth was solid at 2.0%. Since imports only increased by 0.6%, external demand contributed 0.3 percentage points to the overall growth rate. Private investment also rose at solid rates, while private consumption barely expanded. Interestingly, the growth rate of GDP in the first quarter was revised upwards in recent months from a sharp contraction to a small growth rate of 0.1% (annualized 0.6%).

Japan has struck a deal with the United States that establishes a 15 % so-called reciprocal tariff rate, including on automobiles. These tariff rates are lower than feared. Exports and the Japanese economy will nevertheless be hurt. We expect somewhat slower economic growth in the second half of 2025 and a gradual acceleration of economic growth in 2026. Private consumption will be a more solid driver of economic growth with declining inflation rates.

At the monetary policy meeting of the Bank of Japan in July, its interest rate remained constant despite higher expected inflation. We currently expect an additional interest rate hike in October. From fiscal policy, no significant headwind is expected. The corporate tax rate will be increased by 4 percentage points to finance higher defense spending.

All in all, we expect gross domestic product to expand by 1.2 percent in 2025, followed by growth rates of 0.5 and 0.8 % in the following years. Inflation will remain elevated this year, but will gradually decrease.