Half of firms expect Japan's economy to grow amid inflation concern

A Kyodo News survey reveals that half of prominent Japanese firms anticipate domestic economic growth in the coming year, a decline from 70% six months prior. The survey, conducted among 111 companies between early and late July, indicates that 51% expect modest growth, 38% predict flat growth, and 5% foresee a moderate economic contraction. In contrast to the January poll, where 70% anticipated steady growth and 25% expected a stagnant economy, the current outlook is more cautious.

Among those projecting a modest economic contraction or flat growth, 54% attribute this outlook to rising prices, while 50% cite sluggish consumer spending and 48% point to a surge in energy costs. Nonetheless, 81% of the companies forecasting gradual expansion anticipate a rebound in capital spending, 77% expect consumer spending to recover, and 68% foresee wage hikes contributing to growth. Notably, none of the surveyed firms predict stronger economic expansion.

Government data from Friday shows that Japan's household spending declined for the seventh consecutive month in June. In response, Japanese companies have agreed to raise wages by more than 5% on average this year, marking the third consecutive year since the initial increase in 2024. Of the surveyed companies, including Toyota Motor Corp., Panasonic Holdings Corp., and Mitsubishi UFJ Financial Group Inc., 58% expect their earnings to grow or increase moderately.

However, 50% of these firms believe the Middle East tensions have adversely affected their businesses due to higher costs for raw materials, energy, and transportation. To offset these rising expenses, nearly half of the companies plan to increase prices over the next year, while three firms indicate they will maintain or reduce prices.

However, many companies declined to answer or remain undecided. The survey does not account for the impact of the magnitude 7.1 earthquake that struck Kumamoto Prefecture on July 28 or the joint intervention by Japan and the United States in the foreign exchange market.