UBS(US:UBS)2025-10-13 01:00Summary of Japan Economic Outlook 2025-2027 Industry Overview - Industry: Japanese Economy - Company: UBS Securities Japan Co., Ltd. Key Messages - Economic Slowdown: The US and Japanese economies are expected to slow down in the next six months due to the US tariff shock [7][10][35] - Cyclical Uplift: A cyclical uplift is anticipated in the next 2-3 years, driven by lower uncertainties and technological advancements [8] - Pivotal Moment: Japan is at a pivotal moment with long-term narratives shaping its economic future [9] Economic Projections - Technical Recession: Japan is likely to enter a technical recession in H2 2025, characterized by falling exports and stagnation in capital expenditure, although consumption is expected to remain resilient [10] - CPI Inflation: Current CPI inflation is close to 3% YoY, but is expected to slow down due to a decrease in food inflation [10] - Policy Rate Expectations: The Bank of Japan (BoJ) is projected to raise its policy rate from 0.5% to 0.75% in March 2026, with a cautious approach due to uncertainties [10][50] - Exchange Rate Forecast: The USDJPY is expected to fall to 143 by the end of 2025 from the current 150, influenced by the Fed's anticipated rate cuts [10] Economic Normalization - 1-2-3 Normalization: Japan's economy is expected to normalize with 1% real GDP growth, 2% CPI inflation, and 3% wage growth in the coming years [10][48] - Wage Growth: Sustained wage growth is anticipated due to a secular labor shortage, supported by government efforts [10] - Investment in Human Capital: An increase in domestic investment in human capital and intangible assets is crucial for accelerating growth [10] Political Landscape - Political Uncertainty: The new leadership under Ms. Takaichi faces challenges in maintaining approval ratings and avoiding market turmoil [10][11] - Fiscal Policy: The fiscal deficit is declining, but concerns remain about the impact of fiscal expansion on long-term bond yields and sovereign ratings [29][31] Long-term Challenges - Demographics and Debt: Japan continues to face secular challenges from demographics and high government debt, which may hinder long-term growth [164][146] - De-globalization Trend: A mega trend of de-globalization and a shift towards a high-tech-driven economy is expected to continue [164] Scenarios for the Future - Three Scenarios: The outlook includes three potential scenarios for the next 5-10 years: past trend, accelerating growth, and decelerating growth [10] - Investment Needs: Addressing insufficient domestic investment by the non-financial corporate sector is critical for future growth [169] Conclusion - Pivotal Year: 2025 could be a pivotal year for Japan, with potential factors for economic upturn including a return of price mechanisms, geopolitical changes, technological advancements, and generational shifts in leadership [154][156]