Japan: Real income gains drive a consumption‐led recovery

Japan: Real income gains drive a consumption-led recovery We've maintained our GDP growth forecast for Japan at 0.2% for 2024 but cut our 2025 projection to 1.1%.We still expect the Japanese economy will recover in the following quarters as households' real income gains will drive stronger consumption.But exports will likely stay stagnant due to weak demand from the EU counteracting the benefits from chip cycle upticks. Business investment and consumption were revised down slightly in the latest estimate of Q2 GDP.But we think the economy is still recovering from its dip in Q1.Monthly indicators suggest consumption continued to improve in Q3 alongside the ongoing improvement in real wages.Real wages rose for a second consecutive month in July as Spring Negotiation results are now being reflected in monthly payrolls and supply-side driven inflation is fading. Former defence minister Shigeru Ishiba won the Liberal Democratic Party presidential election on September 27.We think he'll follow the Kishida administration's economic policy.While remaining open to fiscal consolidation in the long term, more focus will be on economic growth in the near term.The government is unlikely to intervene in the Bank of Japan's policy normalisation.Ishiba announced plans to call a national election as early as late October.This indicates the BoJ's October meeting will likely occur soon after the election. The Bank of Japan kept its policy rate at 0.25% at its September meeting.We now expect the central bank will deliver an additional rate hike in December, given the updated political calendar and the recent yen strength.