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As we approach the second half of 2025, the inflation trajectories of China and Japan reflect contrasting dynamics shaped by domestic economic conditions, external influences, and global uncertainties. Leveraging our proprietary forecasting models and comparative insights, we explore the detailed inflation outlook for these two critical Asian economies.

China: From Mild Deflation to Seasonal Rebound

Deflation to Continue Through 2025

China’s inflation forecast for the next 12 months initially suggests subdued price growth, with the possibility of mild deflation emerging in late 2025. Core factors behind this outlook include persistently weak domestic demand, significant industrial overcapacity, and stable food prices bolstered by robust import volumes. Specifically, extensive food imports and ongoing producer price deflation driven by manufacturing overcapacity reinforce these downward price pressures. As manufacturing capacity begins to decline gradually, structural disinflationary forces may weaken (Figure 1).

Figure 1

All Eyes on Domestic Demand

A modest inflationary rebound is expected in early 2026, primarily driven by increased consumer spending during the Lunar New Year season. The magnitude of this seasonal recovery will largely hinge on consumer confidence and spending behavior, shaped by the availability of targeted subsidies and broader economic uncertainty. For example, previous government incentives such as subsidies on household appliances and electronics effectively stimulated spending. However, the current environment, characterized by the highest global uncertainty levels in the past five years, encourages increased consumer savings and dampens demand (Figure 2). Future stimulus measures may therefore focus on stabilizing consumer sentiment to promote spending. The government’s recent initiatives to limit aggressive price competition among firms further aim to stabilize the market. Should seasonal demand in early 2026 align with previous years, a steady uptick in inflation is anticipated.

Figure 2

China Pays the U.S. Tariff Bill

Newly proposed U.S. tariffs, set to rise from 30% to 55% on August 12, 2025, introduce complexity into China’s inflation dynamics. Although higher tariffs may temporarily raise import costs and introduce mild inflationary pressures via increased shipping costs (Figure 3) and retaliatory tariffs, their overall impact is expected to be predominantly disinflationary. Reduced export volumes resulting from elevated tariffs are likely to limit economic growth, thereby exerting stronger downward pressure on domestic prices.

Figure 3

Comparison with External Forecasts

The broader consensus from external institutions aligns closely with our forecast, predicting generally subdued inflation. For instance, ING anticipates a progression from slight deflation (-0.1%) in 3Q25 to modest inflation (2.0%) by 4Q26, while the Asian Development Bank (ADB) and IMF foresee CPI around 0.4% and 0.41% respectively in 2025. Our model’s recent performance underscores its reliability, ranking highly with a strong nowcast accuracy (MAE of 0.0827).

Japan: Navigating Persistent Inflationary Pressures
Japan currently experiences heightened inflation (~3.3%), largely driven by persistent core price pressures excluding fresh food, tight labor market conditions (with unemployment around 2.5%), and significant food price increases—particularly notable in rice prices (up nearly 95%). Seasonality and sustained domestic consumer demand further compound these upward pressures.

Elevated Short-Term Inflation

On the upside, several domestic drivers exert sustained inflationary pressures. Persistent core inflation (excluding fresh food) indicates broad-based price increases across sectors, suggesting entrenched inflation dynamics. A notably tight labor market, characterized by low unemployment (~2.5%), continues to drive moderate wage growth, enhancing both demand-pull and cost-push inflationary forces and keeping core inflation elevated. However, if we look at contractual earnings for firms with more than 5 employees, we see earnings decelerate providing a downward pull towards Japan’s 2% target (Figure 4)

Figure 4

Significant increases in food prices, notably a nearly 95% surge in rice prices, directly escalated consumer costs. Consequently, numerous manufacturing companies have raised prices on thousands of packaged products containing these commodities, further intensifying inflationary pressures on essential goods. Elevated consumer inflation expectations, indicative of heightened price awareness, reinforce these upward price dynamics. Although price perceptions for the upcoming 2 to 3 months have significantly declined from their April 2025 peak, the recent upward trend since early July 2025, coinciding with heightened global trade tensions, indicates upside price pressures ahead (Figure 5).

Figure 5

Additionally, Tokyo’s core Consumer Price Index (CPI) acts as a crucial leading indicator, signaling ongoing short-term upward inflation trends across the country. Regular seasonal factors, including fiscal-year pricing adjustments, periodically contribute to fluctuations and volatility in inflation rates. Moreover, although industrial capacity utilization remains high, its recent slight decline indicates manufacturers are experiencing reduced cost pressures (Figure 6). Previously, these pressures consistently transferred to consumers, amplified by rising energy-related input costs that have since diminished.

Figure 6

Counterbalancing Disinflationary Forces

Conversely, significant downward pressures have counterbalanced inflationary trends. Stable or declining crude oil and energy prices, reinforced by government fuel subsidies, directly reduce headline inflation. Additionally, external factors, such as the substantial 25% tariff imposed by the U.S. in August 2025, have curtailed Japanese exports, exerting negative pressure on domestic economic growth and easing overall inflationary pressures. Furthermore, widespread global economic uncertainty has suppressed both international and domestic demand, serving as an additional disinflationary force. These conditions have led investors to seek refuge in the yen as a safe-haven currency during economic volatility, as evidenced by strongly positive CFTC JPY positions (Figure 7). This expected yen appreciation further mitigates imported inflationary pressures in the coming months. However, with trade agreements progressing between Japan and the U.S., and increasing clarity regarding a permanent U.S. global tariff regime, CFTC JPY positions have begun trending downward.

Figure 7

Gradual Convergence Towards BoJ’s Target

Considering these dynamics, inflation is expected to steadily decrease toward the Bank of Japan’s 2% target by late 2025 to early 2026. External sources reinforce this view, with forecasts from ING and Bloomberg projecting inflation moving down to around 2% by the end of 2026. Our model’s recent performance affirms its effectiveness, achieving strong accuracy with a low nowcast error (MAE of 0.0647)

The inflation outlooks for China and Japan underscore distinct economic narratives influenced by domestic structural conditions, global uncertainties, and policy environments. China faces immediate deflationary challenges countered by seasonal and commodity-driven recoveries, while Japan balances persistent inflation pressures against external disinflationary forces.