IMF Lowers Japan's Economic Growth Forecast for 2023

By Leika Kihara
TOKYO (Reuters) – The International Monetary Fund (IMF) on Tuesday cut this year's economic growth forecast for Japan but projected a rebound in 2025, believing rising real wages will support consumption.

The IMF's optimistic outlook for consumption aligns with the Bank of Japan's view that ongoing wage hikes will enhance households' purchasing power and help the economy endure 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 due to supply chain disruptions in the auto industry and the diminishing effects of a tourism surge. This forecast represents a reduction of 0.4 percentage points from the July outlook.

The economy is expected to grow by 1.1% in 2025, driven by private consumption as real wage growth strengthens, according to the IMF.

The forecasts are based on the assumption that the Bank of Japan (BOJ) will maintain a consistent monetary policy. "The policy rate is projected to continue to rise gradually over the medium term toward a neutral setting of about 1.5%," the IMF stated.

Japan's economy experienced a 2.9% annualized growth rate in the second quarter, supported by steady wage increases, though weak demand from China and slowing growth in the U.S. presents challenges for the export-dependent nation.

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, believing Japan is on track to meet its 2% inflation target.

BOJ Governor Kazuo Ueda has indicated the bank's readiness to further raise interest rates if economic and inflation developments align with forecasts.

In forecasts from July, the BOJ projected Japan's economy to grow by 0.6% in the current fiscal year ending in March 2025, accelerating to 1.0% in fiscal 2025. Quarterly projections will be revised at the next policy meeting on Oct. 30-31.