Japan Week Ahead: Q2 GDP to Show Faster Economic Growth, July Exports Seen Up Sharply, Subsidies Offsetting Upward Pressures in CPI from Mideast Conflict, Weak Yen

By Max Sato

(MaceNews) – It is quiet on the policy front in the coming week with no public speeches by Bank of Japan board members scheduled until Aug. 27 when Deputy Governor Ryozo Himino, a former financial industry regulator, speaks to business leaders in Saitama, just north of Tokyo, on the latest economic and financial conditions as well as the bank’s decision to stand pat on policy at the end of July.

The Diet has been in recess since the 150-day special session ended on July 25. Government leaders are seeking ways to ease the impact of the Middle East conflict with fuel and utility subsidies and trying to figure out how to finance their plans for a temporary two-year sales tax cut to 1% from the existing 10% rate, effective in April 2027. The latter fiscal measure has come under fire from critics who argue that the purpose of the sales tax is to help stabilize the public pension and health care systems, which should support middle to low-income families.

Among the data for the coming week, Japan’s GDP for the April-June quarter is widely expected to record a faster pace of economic growth from January-March, thanks to resilient consumer spending and business investment. The median economist forecast of an annualized 2.3% expansion in Q2 would be well above the weaker-than-expected 1.5% annual rate for the U.S. economy but below an early estimate of an unusually high 3.3% growth rate for Canada.

Machinery orders are expected to post a rebound in June but fail to meet the official forecast of a slight rise in the April-June quarter. Yet the indicator of business investment is likely to reflect solid needs to digitize and automate operations amid labor shortages.

The July trade data is forecast to show exports continued to rise sharply from year-earlier levels, overcoming the impact of stiff tariffs imposed by the Trump administration last year. Imports have also been increasing rapidly amid elevated costs of energy and other goods amid the Iran war. The expected result is a third straight month of trade deficit.

On the consumer inflation front, many firms from different sectors have been raising retail prices to pass higher import, production and labor costs but the upward pressures have been partly offset by fuel and utility subsidies. The trend is unchanged under the new 2025 base year that the government is using, effective with July national CPI data.

The Ministry of Internal Affairs and Communications has announced that the net effect of updating the weighting of items in the CPI basket of goods and services and resetting the base year among other changes is zero to a slight 0.1 percentage downward shift in the consumer price index for the first six months of the year.

For example, the year-on-year change in the total CPI for June has been revised down to 1.6% under the 2025 base year from 1.7% calculated under the previous formula and reported last month. However, there is no change to the annual rates of 1.6% for the core measure (excluding fresh food) and 1.7% for the core-core index (excluding fresh food and energy).

The government added 19 items to the CPI basket and left out 11 others when it updated the index to the 2025 base year from 2020, reflecting recent lifestyle and demographic changes. It merged two items into one. As a result, the total number of goods and services surveyed for the index rose to 589 from 582, not a big change.

The major revision to CPI is conducted every five years to correct for statistical upward drift and reflect the latest consumer spending patterns.

Among the new items added under the 2025 base year are helmets and vehicle leasing in the transportation and telecommunications category. Salted mackerel, pork cutlet bento, jelly beverages and other items in foodstuffs are in while ‘niboshi’ (small dried fish used for making soup stock) and pickled Chinese cabbage are out. In the clothing and footwear section, neckties, women’s ‘obi’ belts and stockings have been removed from the list. 

In the education/entertainment category, headphones/earphones, qualification exams and pet insurance policies have been brought in, replacing soccer game tickets and video rental fees. Among miscellaneous expenses, hair dryers and deodorant replaced bank transfer fees.

Monday, Aug. 17
0850 JST (2350 GMT/1950 EDT Sunday, Aug. 16) The Cabinet Office releases preliminary GDP for April-June.
Mace News median: +0.6% q/q (range +0.4% to +0.7%) vs. Q1 revised +0.5%; +2.3% annualized (range +1.6% to +2.9%) vs. Q1 revised +1.8%; +0.7% y/y (range +0.2% to +1.3%) vs. Q1 revised +0.4%

Japan’s economic growth is expected to have accelerated slightly in the April-Nune quarter from the first three months of the year, backed by resilient consumer spending and plans by many firms to upgrade their factories, offices and shops.

The median forecast for the Q2 gross domestic product due is a solid 0.6% rise on quarter, or an annualized 2.3%, compared to the Q1 growth rates of 0.5% and 1.8%.

The Japanese auto industry has weathered the impact of high U.S. tariffs while global demand for computer chips and non-ferrous metals remains strong. Domestically, firms are digitizing operations to cope with labor shortages.

Consumers are also seen contributing to the Q2 growth, backed by substantial nominal wage hikes by many firms in the third straight year and on-and-off subsidies to help cap fuel prices and utility bills. There is also a temporary boost to sales of air conditioners before the government applies tighter energy-saving standards in April 2027. The elimination of a special environmental tax on vehicle purchases in March this year has been helping the recent pick-up in demand for automobiles.

Domestic demand is expected to add 0.3 percentage point to the Q2 GDP, up from a positive 0.2-point contribution in Q1 while net exports (exports minus imports) are seen lifting total domestic output by 0.3 point, the same as in the prior quarter.

Private consumption, which accounts for about 55% of the total domestic output, is projected to be resilient, rising 0.5% on quarter in Q2 for a ninth straight gain, up from +0.3% in Q1. Business investment in equipment and software is forecast to rebound by 0.4% after slumping 0.7% previously.

Consensus forecasts for key components are quarter-on-quarter percentage changes except for domestic demand, private inventories and net exports, whose contributions are in percentage points. Figures in the previous quarter are shown in parentheses:

GDP q/q: +0.6% (+0.5%); 3rd straight rise
GDP annualized: +2.3% (+1.8%); 3rd straight rise
GDP y/y: +0.7% (+0.4%); 8th straight rise
Domestic demand: +0.3 point (+0.2 point); 3rd straight rise
Private consumption: +0.5% (+0.3%); 6th straight rise
Business investment: +0.4% (-0.7%); 1st rise in 2 qtrs
Public investment: +0.6% (+1.5%); 2nd straight rise
Private inventories: +0.0 point (-0.1 point); 1st rise in five qtrs
Net exports (external demand): +0.3 point (+0.3 point), 2nd straight rise

Wednesday, Aug. 19
0850 JST (2350 GMT/1950 EDT Tuesday, Aug. 18) The Cabinet Office releases June, Q2 machinery orders, Q3 outlook.
Mace News median: core orders +8.6% m/m (range: +6.5% to +11.7%) vs. May -12.4%; +11.0% y/y (range: +8.9% to +15.1%) vs. May -1.9%; Q2 -0.1% q/q (range: -0.8% to +0.8%) vs. Q1 +6.4%.

Japan’s core machinery orders, a key leading indicator of business investment in equipment and software, are forecast to rebound 8.6% on the month in June, reflecting strong global demand for semiconductor-producing equipment and domestic needs to digitize and automate operations amid widespread labor shortages. It would follow a 12.4% slump to a six-month low of ¥962.0 in May in payback for an 8.7% jump to a record high of ¥1.099 trillion in April.

Core orders, which exclude those from electric utilities and for ships, are expected to slip 0.1% on quarter in the April-June quarter for their first drop in three quarters. That would be weaker than the official projection of a 0.3% increase provided three months ago.

The Cabinet Office is likely to maintain its assessment that machinery orders are “showing signs of a pickup.” From a year earlier, too, core orders are forecast by economists to rise 11.0% after falling 0.9% in May for their first drop in six months and surging 15.6% in April.

The Bank of Japan’s quarterly Tankan business survey in the June quarter released in July showed an unexpected improvement in sentiment among many large manufacturers as the positive impact of solid export demand for production machinery and computer chips more than offset the drag from elevated costs triggered by the Mideast conflict. Large firms revised up their plans to increase capital investment while smaller firms turned slightly more cautious.

Thursday, Aug. 20
0850 JST (2350 GMT/1950 EDT Wednesday, Aug. 19) The Ministry of Finance release July trade.
Mace News median: exports +21.2% y/y (range: +19.0% to +23.8%) vs. +19.3% in June; imports +26.5% y/y (range: +21.0% to +29.2%) vs. +25.4% in June; trade deficit ¥670.70 billion (range: a deficit of ¥708.80 billion to a deficit of ¥250.00 billion) vs. a revised ¥409.93 billion deficit in June from ¥406.9 billion deficit; ¥156.28 deficit in July 2025

Japanese export values are forecast to post a 21.2% jump on the year in July for an 11th straight gain after rising 19.3% to their second largest amount on record in June as the auto industry has weathered the drag from stiff U.S. tariffs and global demand for memory chips and non-ferrous metals remains strong, the factors that prompted the government to upgrade its view on exports in June in its monthly economic report to say they are “showing signs of a pickup” vs. “largely flat.”

Import values are expected to mark a sixth straight rise, up 26.5%, after surging 25.2% to a record ¥11.34 trillion in June, as the weak yen has eroded Japan’s purchasing power and the lingering Mideast conflict kept energy and transportation costs elevated. The recent double-digit gains were driven by computer chips and non-ferrous metals. June imports were also boosted by higher prices of crude oil.

A rare Japan-U.S. dollar-selling market intervention at the end of July pushed down the U.S. currency to around ¥157.20 from above ¥163 but Bank of Japan data showed the dollar averaged at ¥162.55 during Tokyo trading hours in July, still much stronger than ¥146.71 seen a year earlier.

Japan’s trade balance is expected to show a third straight deficit, with the shortfall seen widening to ¥670.70 billion from a revised ¥409.93 billion deficit in June and a ¥156.28 billion deficit in July 2025.

Friday, Aug. 21
0830 JST (2330 GMT/1930 EDT Thursday, Aug. 20) The Ministry of Internal Affairs and Communications releases July CPI.
Mace News median: total CPI +1.9% y/y (range: +1.8% to +2.0%) vs. June +1.7%; core CPI (ex-fresh food) +1.8% y/y (range: +1.7% to +1.9%) vs. June +1.6%; core-core CPI (ex-fresh food, energy) +1.9% y/y (range +1.8% to +2.0%) vs. June +1.7%

Japan’s consumer inflation is expected to continue accelerating in July under the 2025 base year as overall energy prices posted a smaller drop and the recent trend of easing processed food price markups stalled. The weak yen has made imports more expensive and retailers are reflecting higher labor, materials, packaging and transportation costs amid widespread worker shortages and the lingering Mideast conflict.

The Ministry of Internal Affairs and Communications has announced that the net effect of updating the weighting of items in the CPI basket of goods and services and resetting the base year among other changes is zero to a slight 0.1 percentage downward shift in the consumer price index in the first six months of 2026.

All three key CPI measures are set to remain just below the Bank of Japan’s 2% target as revived fuel subsides have capped gasoline and diesel prices nationwide. In addition to city water subsides, families in the Tokyo metropolitan area also benefit from free daycare services.

The year-on-year increase in the core CPI (excluding fresh food) is forecast to have accelerated to a four-month high of 1.8% after rising to 1.6% in June (unrevised under the new base year) from 1.4% in May but it would be still tame compared to a recent peak of 3.7% hit in May 2025.

The annual rate of the total CPI is also seen firming to a seven-month high of 1.9% after edging up to 1.6% in June (revised down under the 2025 base year from 1.7% under the previous formula) from 1.5% in May. Overall inflation has come down gradually from 4.0% at the start of 2025.

Underlying inflation, as measured by the core-core CPI that exclude fresh food and energy, is expected to rise to 1.9% (unrevised) after easing to 1.7% in June and 1.8% in May from 1.9% in April. It is well below the recent peak of 3.4% reached in June 2025.

Residents in the Tokyo metropolitan area are 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, however, are limited in the national average CPI.

At its latest meeting on July 30-31, the BOJ’s nine-member board decided to leave the target for the overnight interest rate at 1% in an 8 to 1 vote as the bank is still monitoring the impact of its fifth hike in the current cycle that was conducted last month. The board again vowed to “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation. Underlying inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative, it noted.

Friday, Aug. 21
1600 JST (0700 GMT/0300 EDT Friday, Aug. 21) The Bank of Japan releases the real export indexes for July based on the trade data released by the Ministry of Finance.