The International Monetary Fund (IMF) on Tuesday cut this year's economic growth forecast for Japan, but projected a rebound in 2025 on the view rising real wages will underpin consumption.
The IMF's upbeat projection on consumption is line with the Bank of Japan's view that continued wage hikes will boost households' purchasing power, and keep the economy strong enough to weather further interest rate hikes.
In its World Economic Outlook (WEO) report for October, the IMF projected Japan's economic growth to slow to 0.3% this year from 1.7% in 2023 because of supply disruptions in the auto industry and the fading one-off boost from a surge in tourism. The forecast was cut by 0.4 percentage point from the outlook given in July.
The economy is likely to expand 1.1% in 2025 "with growth boosted by private consumption as real wage growth strengthens," the IMF said.
The organization based its forecasts on an assumption that the Bank of Japan (BOJ) would maintain a steady monetary policy path.
"The policy rate is projected to continue to rise gradually over the medium term toward a neutral setting of about 1.5%," the IMF said.
Japan's economy expanded by an annualised 2.9% rate in the second quarter as steady wage hikes underpinned consumer spending, though soft demand in China and slowing U.S. growth cloud the outlook for the export-reliant country.
The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July on the view Japan was making steady progress toward achieving its 2% inflation target.
BOJ Governor Kazuo Ueda has signalled the bank's readiness to raise interest rates further if economic and price developments move in line with its forecasts.
In forecasts made in July, the BOJ expects Japan's economy to expand 0.6% in the current fiscal year ending in March 2025, and accelerate to 1.0% in fiscal 2025. It will revise the quarterly projections at its next policy meeting on Oct. 30-31.
