Japan’s Economic Outlook for Fiscal Years 2025-2026 (May 2025)

Economic Research Department Executive Research Fellow Taro Saito

■Summary

<Real GDP Growth Forecast: 0.3% in FY 2025, 0.9% in FY 2026>

Real gross domestic product (GDP) in the January–March quarter of 2025 posted a decline of 0.2% from the previous quarter (down 0.7% on an annualized basis), marking the first contraction in four quarters. There is no need for excessive concern given that the primary cause of this negative growth was a significant decline in external demand due to a sharp rise in imports. However, from the April–June quarter onward, US tariff increases are expected to exert adverse effects on the Japanese economy through multiple transmission channels.
With the recovery in domestic demand expected to remain moderate and a notable decline in exports anticipated—particularly to the US—real GDP is likely to post negative growth for a second consecutive quarter in the April–June 2025.
Real GDP growth is projected at 0.3% for FY 2025 and 0.9% for FY 2026. From the July–September quarter of 2025 onwards, a recovery in private consumption and capital investment is expected to support a return to positive growth as the effects of the tariff hikes gradually wane. However, if the currently suspended additional reciprocal tariffs are enacted, negative growth could persist, increasing the risk of the economy slipping into a recession.
The rate of increase in consumer prices (excluding fresh food) is projected to be 2.4% in FY 2025 and 1.6% in FY 2026. While high wage growth is expected to accelerate the rise in service prices, the appreciation of the yen and a decline in crude oil prices will likely lower import prices and moderate goods price inflation. As a result, the inflation rate is expected to fall below the Bank of Japan’s 2% target in 2026.

■Index

1．Negative Growth of 0.7% on an Annualized Basis in the January–March Quarter of 2025
(Impact of Trump’s Tariffs)
(Spring Wage Negotiations in 2026 Expected to Show a Slower Pace of Wage Increases)

2．Real GDP Growth Forecast: 0.3% in FY 2025 and 0.9% in FY 2026
(Two Consecutive Quarters of Negative Growth Expected in the April–June Quarter of 2025)
(Corporate Investment Behavior Likely to Become More Cautious)
(Price Outlook)