Japan Week Ahead: Resilient Economy Faces Inflationary Pressures, Structural Fragility as Mideast Conflict Rages on, Weak Yen Keeps Imports Expensive

–June Exports Forecast to Post 10th Straight Y/Y Rise, CPI Seen Up Slightly but Still Below BOJ’s 2% Inflation Target

By Max Sato

(MaceNews) – Japan’s economy has shown resilience in the face of protectionist U.S. trade policy and the lingering Mideast conflict. Exports have weathered the drag from stiff Trump tariffs on autos and metals, business investment plans remain solid amid widespread labor shortages, and consumers are cautiously loosening their purse strings.

But Japan’s wobbly economic growth also faces some fragility. The core measure of consumer inflation has stayed under the Bank of Japan’s 2% price stability target for four months through May, partly because processed food price rises have continued to ease since domestic rice shortages were resolved last year but also because retail gasoline and diesel prices have been artificially restrained by on-and-off subsidies. Many firms plan to raise prices further to reflect rising costs of labor, materials and transportation. The weak yen is keeping imports expensive.

The government is seeking to reassure people about the supply of crude oil and naphtha, the key petroleum product for making plastics and resins that are widely used in vehicles, appliances, building materials and product packages. It has helped temporarily boost energy purchases from the United States and other countries to bypass the Persian Gulf amid uncertainty over a U.S.-Iran ceasefire. However, Japan still heavily relies on crude oil imports through the Strait of Hormuz and its move toward securing alternative energy sources has been slow.

These structural issues will keep Bank of Japan policymakers cautious about raising interest rates at a faster pace than now (every six months or so) even though business sentiment has improved during the Iran war. BOJ officials are concerned about upside risks to their inflation outlook but the nature of a rate hike in coming months is not to cool off economic activity. It is to lift the policy rate toward a more neutral level. Real wage growth is still sluggish and the recent stock market bull run is not benefiting the low- to middle-income earners who are struggling to make ends meet. The BOJ board is expected to hold the policy rate unchanged later this month after conducting its fifth rate hike in the current cycle last month.

For this week, the June trade data will help economists measure the strength of external demand in the second quarter GDP due on Aug. 17 before checking the pulse of business investment and consumer spending in industrial production and retail sales at the end of the month. In its monthly economic report for June, the government upgraded its assessment of exports for the first time in 16 months, saying they “have shown signs of a pickup.” Previously, it said exports were “largely flat.”

The June CPI data is forecast to show consumer inflation accelerated slightly in the core measure but remains under the BOJ’s 2% target, thanks to fuel subsidies and other fiscal measures.

Wednesday, July 22
0850 JST (2350 GMT/1950 EDT Tuesday, July 21) The Ministry of Finance release June trade.
Mace News median: exports +18.0% y/y (range: +15.0% to +20.6%) vs. +16.8% in May, revised from +17.0%; imports +20.0% y/y (range: +15.8% to +26.0%) vs. +12.5% in May; trade deficit ¥47.25 billion (range: a deficit of ¥345.10 billion to a surplus of ¥150.50 billion) vs. ¥391.79 billion deficit in May, revised from ¥378.6 billion deficit; ¥122.47 surplus in June 2025

Japanese export values are forecast to rise 18.0% on the year in June for a 10th straight increase following a revised 16.8% gain in May as the base effect of high U.S. tariffs on autos and metals has faded and global demand for computer chips and non-ferrous metals remains strong.

Import values are expected to mark their fifth straight rise, up 20.0%, after a 12.5% increase in May, which was led by higher purchases of computer chips, refined petroleum products and non-ferrous metals. Japan has been importing naphtha, key material to produce plastics and resins, and other material countries outside the Middle East to address domestic shortages triggered by the Iran war.

The trade balance is estimated to be a deficit of ¥47.25 billion for the second straight negative figure, after posting a revised ¥391.79 billion shortfall in May. It compares with a ¥122.27 surplus in June 2025.

Wednesday, July 22
1600 JST (0700 GMT/0300 EDT Wednesday, July 22) The Bank of Japan releases the real trade indexes for June based on the MOF’s trade data.

Friday, July 24
0830 JST (2330 GMT/1930 EDT Thursday, July 23) The Ministry of Internal Affairs and Communications releases June CPI.
Mace News median: total CPI +1.6% y/y (range: +1.6% to +1.7%) vs. May +1.5%; core CPI (ex-fresh food) +1.6% y/y (range: +1.5% to +1.7%) vs. May +1.4%; core-core CPI (ex-fresh food, energy) +1.7% y/y (range +1.6% to +1.9%) vs. May +1.8%

Japan’s consumer inflation is expected to accelerate slightly in two of the three key measures due to a smaller drop in gasoline prices compared to a year earlier, which limited the impact of a continued moderation in processed food markups. All three key CPI measures are still below the Bank of Japan’s 2% target, thanks to revived fuel subsides and free high school education that took effect in April, both of which are partly offsetting the impact of the widespread move to reflect higher costs of imports, labor and transportation in sales prices.

Residents in the Tokyo metropolitan area are also benefiting from free daycare services as well as a four-month program to wave base city water charges during the peak of the summer, from May for some households and June for others. The effects of those fiscal measures are having a bigger impact on bringing down inflation in the Tokyo CPI data.

The year-on-year increase in the core CPI (excluding fresh food) is forecast to have accelerated to 1.6% after being unchanged at 1.4% in May and decelerating sharply to a four-year low of 1.4% in April from 1.8% in Mach. The Iran war drove the national average regular gasoline price to a record high in mid-month, just before renewed subsidies took effect to cap retail prices of gasoline and diesel oil.

The annual rate of the total CPI is also seen firming to 1.6% after rising to 1.5% in May from 1.4% in April and 1.5% in March. The April rate was the lowest since March 2022, when it was 1.2%, which was followed by a spike to 2.5% a month later (the core CPI rose 2.1%) as the world felt the full impact of Russia’s invasion of Ukraine that triggered a surge in energy and commodities prices amid supply disruption concerns.

Underlying inflation, as measured by the core-core CPI that exclude fresh food and energy, is estimated at 1.7%, easing further from 1.8% in May, 1.9% in April and 2.4% in March. It is well below the recent peak of 3.4% reached in June 2025 and the lowest since 1.6% in August 2022.

For a clearer trend in consumer inflation, BOJ officials have stressed that they are focused more on the bank’s own core measures that exclude the effects of institutional factors (sales tax cuts, energy subsidies, etc.), which are pointing to an uptrend in underlying inflation above the bank’s 2% target.

Citing growing upside risks to inflation triggered by the Mideast conflict, the bank’s nine-member board minus Governor Kazuo Ueda, who was temporarily hospitalized for medical treatment, decided to raise the target for the overnight interest rate to 1% from 0.75% in a 7 to 1 vote at its June 15-16 meeting. The fifth rate hike in the current cycle that began in March 2024 is part of the gradual process to unwind large-scale monetary easing.