Credit Agricole Japan Outlook: Weak Domestic Demand, but Investment Could Support a Structural Recovery - FJElite

Domestic demand remains weak, with structural stagnation still visible in Japan’s unusually positive corporate savings rate. Higher oil prices, tighter monetary policy and a weaker global backdrop are weighing on households and purchasing power, while core inflation is expected to slow temporarily. A reduction in geopolitical risk and stronger public-private investment could eventually lift real wages and help domestic demand recover.

Nominal GDP has benefited from reflation, proactive fiscal policy and accommodative monetary policy, but growth is expected to slow temporarily after BoJ rate hikes and worsening terms of trade. Under the Takaichi administration, strategic investment and a temporary VAT cut are expected to support demand, while stronger corporate spending should push the corporate savings rate lower.

A stronger capex cycle is central to the outlook. If investment keeps rising, expectations of greater future supply capacity should limit further strong yen depreciation and eventually support stronger real wage growth. The broader shift would be away from reliance on external demand and toward a more domestically driven economy.