Japan faces stagflation with 0.3% 2024 GDP growth and contraction. 30% chance BOJ hike in December, 90% by March.

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Japan is facing significant economic challenges, with stagflation—a mix of stagnant growth and high inflation—dominating the outlook. The latest data from December 2024 reveals a troubling economic picture.

The economy is projected to grow by just 0.3% year-over-year in fiscal year 2024, with a slight contraction in real GDP of -0.2% for the calendar year. While private consumption surged in Q3 2024 due to tax cuts in June and July, this growth is not sustainable, and both net exports and business fixed investment have declined.

Inflation remains a pressing issue, with Tokyo’s consumer price index (CPI) rising to 3.0% in December 2024, driven by higher energy costs and service-sector price hikes. Core inflation, excluding fresh food and energy, increased to 2.4% from 2.2% in November. These pressures are eroding purchasing power and constraining consumption. Real wages have fallen for over two years, and while there are signs of stabilization, the ongoing suppression of real purchasing power remains a key concern.

Japan’s demographic challenges exacerbate the economic situation. A rapidly aging population and declining birth rates are shrinking the labor force and increasing the dependency ratio, making it difficult to sustain growth. These shifts are amplifying stagflation, as the economy struggles with low growth and rising inflation.

The labor market remains tight, with a jobs-to-applicants ratio of 1.25 in November. While this results in wage increases, these higher wages contribute to rising prices.

Looking ahead to 2025, the economic outlook improves slightly, with a projected growth rate of 1.0%. The Bank of Japan (BOJ) may end its negative interest rates, with Governor Kazuo Ueda hinting at potential rate hikes. Analysts expect at least one rate increase in early 2024, with a 30% probability of a rate hike in December and a 90% chance by March 2024. Japan’s economy faces severe stagflation, with weak growth, high inflation, and demographic challenges. Bold policy changes will be necessary to stimulate growth and control inflation.