TOKYO REPORT Japan Seen Avoiding Recession as Tariff Fears Ease

Tokyo, Oct. 27 (Jiji Press)–Most private think tanks and research institutes in Japan expect the Japanese economy to avoid a recession, despite an anticipated contraction in the July-September quarter of 2025. The improved outlook reflects waning concerns over the tariff policy of the administration of U.S. President Donald Trump, previously a major source of uncertainty. Following a series of negotiations, Japan and the United States agreed to set what Washington calls “reciprocal” tariffs on Japanese imports, as well as tariffs on Japanese automobiles, at 15 pct. While still elevated, the rate is lower than levels previously floated by the United States, easing concerns among Japanese officials. Against this backdrop, expectations are building that the Bank of Japan will implement its next interest rate hike in the second half of the current fiscal year through March. The reciprocal tariffs previously notified to Japan were set at 25 pct. As a result, 27.5 pct duties were in place on Japanese-made automobiles from April. Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute Inc., said the agreement to lower the rate to 15 pct “will somewhat mitigate the negative impact and reduce uncertainty about the outlook.” At the same time, he cautioned that “a high tariff of 15 pct will still be imposed, placing significant downward pressure on the Japanese economy.” He expects exports, particularly automobile shipments, to decline and forecasts that price-adjusted real gross domestic product will contract in July-September. Think tanks and research institutes estimate that the Trump tariffs will reduce Japan’s annual real GDP by roughly 0.2 pct to 0.9 pct. Over the medium to long term, however, the economy is seen remaining resilient. “Even with the Trump tariffs, the economy will slow but not go into recession,” said Kyohei Morita, chief economist at Nomura Securities Co., a view that broadly reflects the prevailing consensus. Such prospects are supported in part by accelerating wage growth amid persistent labor shortages. Additionally, inflation is easing, though it remains relatively high for a country long accustomed to deflation. Earlier spikes in energy and food prices have narrowed, while the yen’s slide against the dollar has slowed. From autumn through early next year, real wages, or pay adjusted for inflation, are expected to turn positive, “buttressing private consumption,” Japan Research Institute Ltd. said. Nomura Securities noted that “the services sector, less susceptible to the impact of tariffs, has become the main driver of the economy.” Regarding the Trump tariffs, Mitsubishi UFJ Research and Consulting Co. offered an optimistic view, saying that “with reciprocal and automobile tariffs set at 15 pct, exports are expected to bottom out gradually, limiting the blow to exporters’ earnings.” The BOJ ended its negative interest rate policy in March last year, then raised rates in July and again in January this year. With the economic impact of the Trump tariffs proving milder than initially feared, many think tanks and research institutes now expect the next BOJ hike to come sometime between October and next March. Meiji Yasuda Research Institute Inc. and Norinchukin Research Institute Co. said that underlying inflation and related indicators are trending higher, and forecast a possible rate increase as early as October. Daiwa Institute of Research Ltd. anticipates a hike in the October-December quarter. Nomura Securities and Barclays Securities Japan Ltd. expect the next rate hike in January, citing domestic political uncertainty and a resulting need for caution over the near term. Meanwhile, SMBC Nikko Securities Inc. and Japan Research Institute forecast a March move, arguing that policymakers will want time to assess the impact of the U.S. tariffs. If there is a lingering risk to the Japanese economy and the BOJ’s monetary policy, it is the fate of the Trump tariffs, which many assumed had been settled. Japan Research Institute noted, “Tariffs could be raised again if the U.S. trade deficit fails to narrow, among other factors.” END [Copyright The Jiji Press, Ltd.]