Investing.com– Barclays (LON:) analysts project Japan’s economy will see a recovery in 2025, driven by domestic demand and strong wage growth, despite risks from US trade policy and political uncertainty.

Real gross domestic product (GDP) is expected to grow by 1.2% in FY25, exceeding the potential growth rate of 0.8%, analysts said in a note. This rebound follows a modest 0.5% expansion in FY24, which was affected by disruptions such as the Noto Peninsula earthquake and auto factory suspensions in early 2023.

The annual spring wage negotiations, or “shunto,” are expected to result in a 5% wage increase, in line with FY24 levels. Barclays attributed this to companies solving structural labor shortages and a change in corporate profit sharing methods.

These wage increases are expected to strengthen consumption and contribute to a virtuous cycle of growth and inflation, according to Barclays.

Inflation is forecast to remain close to 2% in 2025, with a slight drop in the latter half of the year as the yen strengthens and energy subsidies normalize. Core inflation, excluding energy and perishables, is expected to remain stable, supported by higher labor costs and strong service inflation, analysts predicted.

On monetary policy, Barclays expects the Bank of Japan to implement rate hikes in March and October, with a terminal rate of 0.75%. However, political uncertainty—both domestic and international—will influence the timing of these changes.

Concerns include potential US tariffs under the incoming administration of Donald Trump and political instability in Japan, as the LDP-Komeito coalition navigates a minority government situation.

Barclays analysts warned that prolonged uncertainty around global trade policies or the political situation in Japan could dampen capex and business sentiment, particularly in manufacturing.