The International Monetary Fund (IMF) announced on Tuesday a reduction in Japan’s economic growth forecast for this year, citing supply chain disruptions in the auto industry and the waning effects of a tourism surge. The IMF’s World Economic Outlook (WEO) report indicates that Japan’s economy is expected to grow by only 0.3% in 2024, a significant drop from the 1.7% growth seen in 2023. This revision marks a 0.4 percentage point decrease from previous projections made in July.
Despite the current slowdown, the IMF remains optimistic about Japan’s economic trajectory, predicting a rebound in 2025 with a growth forecast of 1.1%. This anticipated recovery is attributed to rising real wages, which are expected to boost consumer spending and enhance households’ purchasing power. The IMF’s optimistic view aligns with the Bank of Japan’s (BOJ) outlook, which highlights the role of sustained wage increases in fortifying the economy against further interest rate hikes.
In its report, the IMF noted that the BOJ is likely to maintain its current monetary policy path, projecting a gradual rise in the policy rate toward a neutral setting of about 1.5%. Japan’s economy had shown promising signs earlier this year, expanding at an annualized rate of 2.9% in the second quarter, fueled by strong consumer spending linked to wage hikes. However, ongoing challenges from soft demand in China and slowing growth in the U.S. present significant hurdles for the export-driven economy.
Following a historic move in March, the BOJ ended negative interest rates and raised its short-term policy rate to 0.25% in July, indicating progress toward achieving its 2% inflation target. BOJ Governor Kazuo Ueda has suggested that the bank is prepared to further increase interest rates if economic conditions align with their forecasts. Meanwhile, the BOJ’s own projections, set to be revised during its upcoming policy meeting on October 30-31, indicate an expected growth of 0.6% for the current fiscal year and an acceleration to 1.0% in fiscal 2025.
