Japan’s economic growth moderated to 0.1 percent in 2024 following the post-pandemic rebound. Although the economy contracted sharply in Q1 2024, growth rebounded over the subsequent three quarters, driven by strong consumption as wage hikes from the “Shunto” wage negotiations began to take effect. Wage increases are expected to remain high on account of a tight labor market and a shift in firm behavior. Corporate earnings are also expected to contribute to higher wages and increased capital investment in 2025, further boosting domestic demand. Goods exports and tourism are projected to remain robust, provided there is no sharp slowdown in major global economies.

Inflation has slowed in 2024, however, CPI (excluding fresh food) inflation remained above the inflation target at 3.0 percent in December. Stripping out fresh food and energy, “core-core” CPI inflation was stable at 2.4 percent in the last two months of 2024 after increasing in successive months since July.

Amid a positive shift in firms’ wage- and price-setting behavior, the BOJ terminated its yield curve control and negative-interest rate policy in March 2024, and renormalized its monetary policy framework using short-term interest rate as its main policy instrument.