Summary of Japan Economic Outlook 2025-2027 Industry Overview - **Industry**: Japanese Economy - **Company**: UBS Securities Japan Co., Ltd. Key Messages - **Global and Japanese Economic Stagnation**: The global and Japanese economies are expected to stall due to the US tariff shock, with UBS adopting a dovish outlook for the next 6-12 months [5][6] - **Cyclical Uplift**: A cyclical uplift is anticipated in the next 2-3 years, driven by lower uncertainties and advancements in technology [5] Economic Projections - **Technical Recession**: Japan is likely to enter a technical recession in H2 2025, characterized by a decline in exports and stagnation in capital expenditure, although consumption is expected to remain resilient [6] - **CPI Inflation**: Japan's Consumer Price Index (CPI) inflation is currently above 3% YoY and is expected to slow down due to falling rice prices, while wage growth and underlying inflation trends are projected to remain upward [6] - **Policy Rate Expectations**: The Bank of Japan (BoJ) is expected to raise its policy rate from 0.5% to 0.75% in March 2026, with potential for a hike as early as October 2025 if the US economy remains strong [6][66] - **Exchange Rate Forecast**: The USDJPY exchange rate is projected to fall to 130 by the end of 2025 from the current range of 145-150, influenced by a 100 basis point cut by the Federal Reserve [6] Political and Fiscal Dynamics - **Political Instability**: Political instability is a significant concern, as the ruling Liberal Democratic Party (LDP) has lost its majority in both houses of the Diet [6][108] - **Fiscal Outlook**: The fiscal condition is expected to improve, but political dynamics may lead to varied outcomes [82] Long-term Economic Factors - **Mega Trends**: The report highlights trends such as de-globalization, multipolar international orders, and a high-tech-driven economy [6][145] - **Demographic Challenges**: Japan faces secular challenges from demographics and high government debt, which are expected to persist [6][129] - **Investment in Human Capital**: An increase in investment in human capital and enhancements in defense, energy, and IT infrastructure, including AI, are deemed crucial for future growth [6] Economic Recovery Outlook - **Recovery Timeline**: Once the tariff shock stabilizes, a global economic recovery is anticipated from H2 2026, with Japan's economy expected to normalize with projected growth rates of 1% real GDP, 2% CPI inflation, and 3% wage growth [6] - **Wage Growth Dynamics**: Wage growth is expected to be sustained due to a secular labor shortage, supported by government efforts to raise the minimum wage [6] Additional Insights - **Inbound Tourism**: The contribution of inbound tourist spending to GDP growth has been significant but is now slowing [47] - **Consumption Trends**: While services consumption is increasing, non-durable goods are on a downtrend, indicating a shift in consumer behavior [40] - **Real Wage Expectations**: Real wages are expected to pick up by the end of the year as inflation falls and nominal wage growth remains steady [44] This summary encapsulates the critical insights from the UBS report on the Japanese economy, highlighting both immediate challenges and long-term opportunities for recovery and growth.