Economic Overview - Japan's economy has shifted from a year of stagnation to a rapid expansion phase in 2023, but faces significant risks from U.S. tariff policies, weak consumer resilience, and global economic slowdown [1] - Despite a positive overall economic performance, structural imbalances are evident, with manufacturing experiencing 13 consecutive months of contraction while the service sector expands [3] Economic Forecasts - Approximately 60% of economists predict negative growth for Japan's economy in Q3, with an average forecast of a 0.1% quarter-on-quarter decline, translating to an annualized drop of 0.6% [2] - The Japanese government has revised its economic growth forecast for FY2025 from 1.2% to 0.7% due to unprecedented pressure on the economy [2] Export Challenges - Japan's export strategies, such as increasing exports and lowering prices, are deemed unsustainable, with the U.S. tariff policy being a major variable affecting Japanese exports [4] - The U.S. has increased tariffs on Japanese goods, significantly raising the tariff on automobiles and parts from 27.5% to 42.5% and on beef from 26.4% to 41.4% [5] Impact on Key Industries - Japan's automotive exports, which account for nearly 30% of total exports, have seen a significant decline, with July exports to the U.S. dropping by 28.4% year-on-year [5] - The Japanese government has lowered its export growth forecast for FY2025 from 3.6% to 1.2% due to the impact of U.S. tariffs [6] Monetary Policy and Inflation - The Bank of Japan has raised interest rates three times in the past year, but the overall economic outlook remains uncertain, making further rate hikes challenging [7] - Core inflation in Japan has exceeded the Bank of Japan's target of 2% for over three years, with the latest inflation forecast for FY2025 adjusted from 2.2% to 2.7% [7][8] Labor Market Dynamics - The "wage-price" spiral mechanism is becoming more pronounced, with labor costs increasingly contributing to inflation, but real wages have been declining for 42 months [9] - The potential for further interest rate hikes may conflict with the pressures from U.S. tariffs, which could exacerbate the challenges faced by Japanese exporters [9][10] External Influences - External pressures, including comments from U.S. Treasury officials, suggest that Japan may need to raise interest rates to strengthen the yen and support U.S. economic interests [10] - The balance between maintaining economic growth and addressing inflation is critical for the Bank of Japan, as premature rate hikes could hinder recovery [10]