AMRO Assesses Japan's Economy Transitioning to Higher Rates, Projects 1.0% GDP Growth in 2025

AMRO Concludes Annual Consultation Visit to Japan

SINGAPORE – The ASEAN+3 Macroeconomic Research Office (AMRO) has concluded its Annual Consultation Visit to Japan, issuing a preliminary assessment on November 7, 2025. The report highlights Japan's economy transitioning to a 'new normal' characterized by higher interest rates and evolving growth and inflation dynamics. AMRO projects Japan's Gross Domestic Product (GDP) to grow by 1.0 percent in 2025.

The consultation visit, which took place from October 27 to November 7, 2025, involved discussions with key Japanese officials, including Minister of Finance Satsuki Katayama and Bank of Japan (BOJ) Governor Kazuo Ueda. The AMRO mission was led by Lead Economist Dr. Runchana Pongsaparn, with AMRO Director/CEO Yasuto Watanabe and Chief Economist Dong He also participating in policy discussions.

Economic Outlook and Growth Drivers

AMRO's assessment indicates that after a soft first quarter, economic activity in Japan picked up in Q2 2025, fueled by stronger private consumption and net exports. The projected 1.0 percent GDP growth for 2025 is expected to moderate to 0.6 percent in 2026, as the full-year impact of tariff effects takes hold.

Amid an uncertain external environment, domestic demand has emerged as a crucial growth driver. This is underpinned by:

• Private consumption
• Investment
• Rising real wages
• Positive business sentiment

These factors are anticipated to sustain the growth momentum.

Monetary Policy and Inflation Dynamics

Japan's economy is navigating a shift towards a higher-rate environment. The Bank of Japan (BOJ) maintained its policy rate after an increase in January 2025, signaling its readiness for gradual normalization of monetary policy. This policy rate adjustment has successfully transmitted to short-term market and lending rates.

Inflationary pressures, while persistent, are showing signs of easing. The Consumer Price Index (CPI) excluding fresh food eased to 2.9 percent in September 2025, down from its peak of 3.7 percent in May 2025. Food prices were a significant contributor to inflation, accounting for more than half of the price increase during the year. AMRO projects inflation to gradually decline from 3.0 percent in 2025 to 2.1 percent in 2026.

Fiscal Landscape and Policy Priorities

On the fiscal front, AMRO estimates that the general government deficit narrowed to 1.8 percent of GDP in FY2024 from 1.9 percent in FY2023, largely due to the phasing out of pandemic-era expenses and normalized spending. The deficit is projected to further decline to 1.5 percent of GDP in FY2025. Public debt, though still high, is easing from 237 percent of GDP in FY2024 to approximately 232 percent in FY2025.

AMRO emphasized the importance of carefully calibrated policies to maintain growth momentum, preserve financial stability, and ensure fiscal sustainability as Japan adapts to this new economic landscape.