Japan’s 10-year government bond yield has fallen to around 1.48% due to concerns over the country’s economic outlook, following April’s wage data that indicated a real decline for the fourth consecutive month. This development highlights the complexities of Japan’s economic landscape, where signs of growth and challenges coexist.
### Economic Growth and Challenges
Japan’s economy has shown signs of improvement, with real gross domestic product (GDP) growing 1.1% year-over-year in the last quarter of 2024. This marks a significant rebound from the 0.7% year-ago contraction in the first and second quarters of the same year. Stronger wage growth has contributed to increased household spending, while business investment and government spending have also supported growth.
However, elevated commodity prices remain a challenge to Japan’s economic renormalization. Despite near-record wage increases, workers are still feeling the strain of rising living costs, with real total cash earnings falling 1.2% year-over-year in February.
### Inflation and Wage Growth
Inflation in Japan has been driven largely by food and energy prices. Fresh food prices rose 13.8% year-over-year in March, while energy prices increased 6.6%. In contrast, core-core inflation, which excludes fresh food and energy prices, accelerated to 2.8% in March. Wage growth has been moderate, with contractual wages up 1.7% in nominal terms, but not enough to keep pace with inflation.
The spring wage hike announcements have been modestly stronger than last year’s, with the Japanese Trade Union Confederation securing average wage increases of 5.5% this year. The government aims to raise the hourly minimum wage from 1,055 yen to 1,500 yen over five years, requiring a 7% annual increase.
### Export Growth and Trade Barriers
Japan’s export growth is expected to face pressure due to rising tariffs in the United States and weakening growth in China. The US has imposed 25% tariffs on finished autos and 24% tariffs on imports from Japan, posing significant headwinds for Japanese auto manufacturers and exporters. Japan’s exports to China, its second-largest goods export market, grew only 0.7% year-over-year in the first quarter of 2025, highlighting the challenges posed by China’s struggling economy.
### Outlook and Implications
Japan’s economic outlook is complex, with both opportunities and challenges. While the economy shows signs of growth, trade barriers and weak domestic demand may hinder progress. The Bank of Japan is likely to continue raising interest rates modestly, which should provide additional strength to the yen. However, commodity price normalization may not be quick, and tariffs in the US and weakening growth in China raise concerns for Japanese exporters.
Overall, Japan’s economic landscape requires careful navigation, balancing growth and challenges to achieve sustainable progress.
