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Japan Lowers This Year’s Growth Forecast as Tariffs Kick in

(Bloomberg) -- Japan cut its growth forecast for the current fiscal year as US tariffs and persistent inflation weigh on the economy, complicating the policy course of the Bank of Japan and adding to pressure on embattled Prime Minister Shigeru Ishiba.

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The government revised its real growth projection for fiscal year 2025 to 0.7%, down from the previous forecast of 1.2%, the Cabinet Office said Thursday. The downgrade partly reflects a darkening global economic outlook as a result of US President Donald Trump’s tariff policies, it said.

Trump has imposed tariffs on countries around the world, including a 15% across-the board levy on Japanese exports to the US. While that’s down from the originally proposed 25% it is still expected to drag on corporate profits. The US has also yet to implement agreed tariff cuts on vehicles and auto parts, which are key exports for Japan.

There’s also new confusion over whether the 15% across-the board tariffs will be added on top of existing levies.

In its latest outlook, the government lowered its view on private consumption amid inflationary pressures. Private spending is now expected to grow 1% this fiscal year, down from a January forecast of 1.3%, according to the Cabinet Office.

Inflation, as measured by the broad consumer price index, is forecast to reach 2.4% this fiscal year, up from the prior forecast of 2%. Rising inflation has fueled expectations of a rate hike in the coming months, although the BOJ is also likely to be wary of slowing growth. In a Bloomberg survey conducted last week, over 60% of economists said they expected a rate increase as early as October.

The softer economic picture adds political pressure on Ishiba, whose standing has weakened following his ruling party’s loss in last month’s Upper House election. Ishiba has been reluctant to accept opposition parties’ calls for cuts to the sales tax, but he may be forced to propose broader price relief steps beyond plans for one-off cash handouts.

Japan will release gross domestic product figures for the three months ending June on August 15.

Alongside the growth revision, the Cabinet Office updated its projection for the primary balance, a key indicator of fiscal health. The balance shows government revenue minus expenditures, excluding interest payments on public debt. The government still expects to achieve a primary balance surplus in the fiscal year starting April 2026, consistent with targets in its latest economic policy blueprint.

Compared with its January forecast, the government projected a higher primary balance surplus for fiscal 2026 at ¥3.6 trillion ($24.4 billion), supported by expectations of increased tax revenue. Japan saw record tax receipts of ¥75.2 trillion last fiscal year, a trend the government expects to continue into the next fiscal period.

Still, Japan’s public finances remain strained by its massive debt burden. The country’s general government debt stands at 235% of GDP, the highest among advanced economies, according to the International Monetary Fund.

Notably, the latest projections do not factor in potential spending on additional economic stimulus, which seems increasingly likely as both ruling and opposition parties call for further relief measures to ease the impact of rising prices. For the current fiscal year, the government initially forecast a primary balance surplus but later revised it to a deficit after accounting for an extra budget.