Japan’s economy is expected to register positive growth in real GDP as inflation begins to ease, according to Deloitte’s latest economic outlook report. The report highlights that if inflation moderates to the Bank of Japan’s 2% target while nominal GDP growth remains steady, Japan could see a meaningful recovery after recent setbacks.
In the first quarter of 2025, Japan’s real GDP shrank by an annualized 0.2%, largely due to declines in public sector spending and a drop in net exports. Despite this contraction, private sector investment showed strength, with nonresidential investment increasing by 4.4% and residential investment by 5.6%. Additionally, consumer spending rose modestly by 1.8% year-over-year, reflecting sustained domestic demand.
However, inflation remains a key challenge. Elevated food prices and rising labor costs have kept inflation above the central bank’s target. Total wage growth for May was only 1%, and when adjusted for inflation, real earnings actually declined by 2.9%, putting pressure on household incomes and consumption potential.
Deloitte’s analysis suggests that the easing of inflationary pressures combined with robust domestic demand could help Japan’s economy rebound gradually throughout the remainder of 2025. Nonetheless, the pace of growth is likely to stay moderate due to ongoing uncertainties including global trade tensions and fluctuating export demand.
The report emphasizes the importance of maintaining supportive fiscal policies and addressing labor market constraints to ensure that growth gains are sustainable.
Overall, Japan’s economic outlook for 2025 is cautiously optimistic, with inflation easing seen as a crucial factor for turning positive real GDP growth into a sustained trend.
