Japan cuts 2025 growth outlook on tariffs, inflation risks

Japan’s government lowered its fiscal 2025 economic growth forecast to 0.7% from a previous estimate of 1.2%, citing the dual headwinds of newly imposed U.S. tariffs and persistent domestic inflation, the Cabinet Office announced Thursday.

The revision reflects a more cautious view of the global economic environment, particularly in light of President Donald Trump’s tariff measures, which include a 15% across-the-board levy on Japanese exports. Although reduced from an earlier proposal of 25%, the tariff is still expected to weigh heavily on corporate earnings, export competitiveness, and business investment.

Uncertainty also lingers over whether the new tariffs will be applied in addition to existing trade barriers, while Washington has yet to implement agreed reductions on auto-related goods — a key export sector for Japan. Analysts warn that this ambiguity may delay corporate planning and dampen investor sentiment, potentially amplifying the drag on growth.

On the domestic front, Tokyo trimmed its private consumption growth forecast to 1% from 1.3%, reflecting expectations that households will remain cautious as price pressures persist. Inflation is now projected to average 2.4% in fiscal 2025, up from the prior 2% estimate, as higher import costs and service prices offset the moderating effect of government energy subsidies.

Looking ahead, the government projects a modest recovery in fiscal 2026, with growth rising to 0.9% as domestic demand strengthens, supported by wage growth expected to outpace inflation for a second consecutive year.

Despite the gloomier short-term outlook, Tokyo still anticipates achieving a primary budget surplus of JPY 3.6 trillion in fiscal 2025, though this projection does not account for possible tax cuts or fiscal stimulus measures currently under discussion — factors that could reshape the growth and budgetary landscape in the months ahead.