Japan’s economy is showing signs of a steady recovery, supported by resilient industrial production, retail sales, and a tight labour market, Think.ing reported. The latest Tankan survey reflected a mixed sentiment, with manufacturing confidence softening due to US trade policy concerns, but the non-manufacturing sector remaining upbeat. Given these trends, the Bank of Japan (BoJ) appears increasingly likely to raise interest rates by 25 basis points in May.

The Tankan survey revealed a decline in the large manufacturing index in the fourth quarter of 2024, while the outlook slipped to 9. However, sentiment in the services sector remained strong, driven by wage growth and robust inbound tourism. Construction and key service industries continued to report confidence well above neutral levels, reinforcing inflationary pressures that the BoJ will monitor closely.

Hard data also point to a modest GDP expansion in the first quarter of 2025. February’s industrial production and retail sales outperformed expectations, with a notable upward revision to January’s retail data. The labor market remains tight, with the unemployment rate declining to 2.4% from 2.5%.

First-quarter GDP is projected to grow by 0.2% quarter-on-quarter, following a 0.6% expansion in Q4 2024. However, risks loom in the second quarter as US tariffs on Japanese cars and other products could dampen growth. Despite this, with inflation consistently above 2%, bolstered by strong wages and consumption, the BoJ is likely to prioritise price stability and move forward with a rate hike in May.