UBS(US:UBS)2025-09-29 03:06Summary of Japan Economic Outlook 2025-2027 Industry/Company Involved - Industry: Japanese Economy - Company: UBS Securities Japan Co., Ltd. Core Points and Arguments Economic Outlook - The global and Japanese economy is expected to slow down in the next six months due to the US tariff shock [5][9] - Japan is likely to enter a technical recession in the second half of 2025, characterized by a decline in exports and stagnation in capital expenditure, while consumption remains resilient [8][16] - Japan's CPI inflation, currently near 3% YoY, is anticipated to decrease as food inflation falls [8][16] - The Bank of Japan (BoJ) is expected to raise its policy rate from 0.5% to 0.75% in March 2026, with a close call for an October rate hike [8][26] - The USDJPY exchange rate is projected to decline to 143 by the end of 2025 from the current range of 145-150 [8][55] Political Landscape - The upcoming LDP president election between Koizumi and Takaichi is not expected to significantly impact financial markets [8][68] - The next general election will be crucial for the LDP's political momentum and stability [8][68] Long-term Economic Recovery - Following the stabilization of the tariff shock, a global economic recovery is anticipated starting in 2026, with Japan's economy normalizing to a "1-2-3" framework: 1% real GDP growth, 2% CPI inflation, and 3% wage growth [8][20][23] - Wage growth is expected to be sustained due to a secular labor shortage, supported by government efforts [8][20] - The BoJ is projected to raise its policy rate semi-annually, potentially reaching a terminal rate of 1.5% [8][28] Mega Trends and Challenges - The report highlights mega trends such as de-globalization and a high-tech-driven economy, particularly in AI [8][153] - Japan faces secular challenges from demographics and high government debt, which may hinder long-term growth [8][139] - However, there is optimism based on historical cycles, suggesting a potential upturn in the economy due to factors like the return of price mechanisms and technological advancements [8][141][143] Economic Projections - UBS's economic outlook for FY2025 is more cautious compared to the BoJ and market consensus, with projected real GDP growth rates of 0.4% for 2025, 1.0% for 2026, and 0.8% for 2027 [25] - Core CPI projections indicate a decrease to 3.0% in 2025, followed by 1.8% in 2026 and 2.0% in 2027 [25] Consumption and Wages - Consumption is currently sluggish, impacted by falling real wages and a higher saving rate [103] - Wage growth has accelerated, particularly in spring negotiations, but small firms are struggling to keep pace with larger firms [112][115] - Solid profits are expected to support domestic demand, especially in capital expenditure [117] Inflation Dynamics - Underlying inflation remains difficult to gauge, but long-term inflation expectations are viewed as a reliable proxy [125] - Inflation has recently reaccelerated above 3% YoY, primarily driven by rising food prices [128] Investment and Growth Scenarios - The report outlines three potential scenarios for the next 5-10 years: past trends, accelerated growth, and decelerated growth [8][155] - Accelerated growth is contingent on increased domestic investment in human capital and intangible assets [8][155] Other Important Content - The report emphasizes the importance of political will in fiscal policy, suggesting that fiscal concerns may be overstated [75][79] - Japan's agreement with the US has not alleviated the burden of a 15% effective tariff rate, which has increased from 1.5% in 2024 [87] - The contribution of inbound tourist spending to GDP growth is high but is now slowing [99]