| I'm Chris Anstey, an economics editor in Boston. Today we're looking at Japan's year ahead. Send us feedback and tips to ecodaily@bloomberg.net or get in touch on X via @economics. And if you aren't yet signed up to receive this newsletter, you can do so here. - Donald Trump's tariff threats are setting off a global supply chain "freakout" that's leaving companies prone to bottlenecks — and more vulnerable to economic shocks.
- China's industrial profits are set for the steepest annual drop in more than two decades. Meanwhile, China is allowing local officials to invest in more areas with a key government bond.
- Recurring applications for US unemployment benefits rose to the highest in more than three years.
In the Chinese astrological calendar, which is also recognized in Japan, 2025 will be the year of the "wood snake." The last one was 1965, when the Japanese economy suffered its first postwar recession — coming off the highs of the previous year, when Tokyo hosted the Olympics and feted its bullet trains and consumer electronics development. Next year, too, is poised to be a year of change — but in a good way. After shrinking in 2024, the economy "will probably grow a brisk 1.8%," Taro Kimura, senior Japan economist for Bloomberg Economics, wrote in his year-ahead outlook. He sees income gains and government steps to ease a cost-of-living crunch boosting consumption. Asia's second-biggest economy has some tailwinds, including an influx of tourist money spurred in part by the lure of a massively undervalued yen. The nation is also ramping up investment in its technology sector, with major semiconductor facilities stretching from the northernmost to southernmost of the archipelago's main islands. The Japanese cabinet just approved a record budget for next year. While the population continues to shrink, employer competition for scarce labor could mean the exit of inefficient businesses, bolstering productivity. A newly dynamic corporate climate that features takeovers and outsiders on boards that would have been hard to envision years ago adds to a sense of vibrancy. At long last, the Bank of Japan's 2% inflation target "looks increasingly secure," according to Kimura. The latest reading on inflation showcased that: Service prices remained hot as companies continued to pass on higher labor costs. While Governor Kazuo Ueda was more cautious than most observers expected in the final 2024 policy decision this month, Bloomberg Economics sees the BOJ raising its benchmark to 1% next year, from the current 0.25%. But there are a couple of wildcards that loom in the new year, one of which is potential tariff increases from the US after Trump starts his second administration. Trump has long bristled over Japanese trade surpluses with the US, even after the treaty ally dropped out of the top five (China, Mexico and Vietnam now make up the top three economies with surpluses.) That's already complicating BOJ policy, with officials citing the US risk as one reason to hold rates at their December meeting. In Trump's first term, then-Prime Minister Shinzo Abe charmed the US president, and stood out by not retaliating against tariff hikes — Japan was the only major nation to do so — limiting broader tensions. But Abe was later assassinated, and Japan's politics have fractured. Current Prime Minister Shigeru Ishiba currently leads a minority government. Whether it can remain in power, and how it handles any trade conflict with the US, only time will tell. Political instability may also have consequences for the BOJ. For now, 2025 looks good for Japan's economy, but the year of the snake may yet bite. The Best of Bloomberg Economics | In a retrospective look at their US economic projections for 2024, Goldman Sachs economists highlighted that, while they had anticipated stronger growth than the consensus view, they still undershot the ultimate performance. With GDP on track to climb about 2.5% this year — fourth-quarter over fourth-quarter — that bested Goldman's 2%, and blew away the consensus view of about 1%. High interest rates proved less of a burden than almost anyone expected. Still, Goldman's team noted they were overoptimistic on the unemployment rate, having viewed it unlikely to surpass 4%. (It was 4.2% in November.) Helping explain both those dynamics was something that counts as "perhaps the biggest discovery of the year," Goldman's David Mericle wrote in a Dec. 21 note — "the magnitude of the immigration surge, which helped to explain how the unemployment rate could rise even as job creation remained strong." | 
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