By Max Sato
(MaceNews) – Here are the key Japanese economic and political events for the coming week following no change in the Bank of Japan’s policy interest rate and a slower tapering pace for the bank’s government bond purchases in fiscal 2026.
The ruling Liberal Democratic Party suffered a setback in Sunday’s Tokyo assembly election, boding ill for Prime Minister Shigeru Ishiba who has been struggling to shore up the approval ratings of his Cabinet amid rising costs of living and falling real wages, the uncertain outlook for trade rows and heightened geopolitical risks.
The Diet’s 150-day ordinary session ended on Sunday, allowing the ruling and opposition camps to officially launch campaigns for the House of Councillors election expected to be held on Sunday, July 20. Half of the 248 seats in the upper house are up for grabs every three years. A series of political funding scandals at the LDP led voters to punish the party in October general elections for the more powerful 465-seat House of Representatives, resulting in a minority government.
Japan relies more than 90% of its crude oil needs on the Middle East, particularly from the United Arab Emirates and Saudi Arbia. This means it is vulnerable to any attacks on commercial shipping through the Strait of Hormuz or its blockade by Iran, which has been drawn into a military conflict with the United States. Tokyo’s status as one of the closest allies of Washington’s poses a risk to its security despite its relatively stable diplomatic ties with Tehran.
On the economic data front, stiff Trump tariffs on autos and metals are already showing in sluggish exports. Japanese carmakers are being forced to lower export prices to cover their U.S. customers’ high import costs. That may be partly reflected in May industrial production, due at the end of June, while Tokyo’s consumer price index data for June, employment and retail sales for May are expected to reflect mostly domestic factors.
– Friday, June 27
0830 JST (1930 EDT/1630 PDT Thursday, June 26) The Ministry of Internal Affairs and Communications releases June Tokyo CPI.
Mace News median: total CPI +3.3% y/y (range: +3.2% to +3.4%) vs. May +3.4%; core CPI (ex-fresh food) +3.4% (range +3.2% to +3.7%) vs. May +3.6%; core-core CPI (ex-fresh food, energy) +3.3% (range: +3.1% to +3.5%) vs. May +3.3%
Consumer inflation in Tokyo, the leading indicator of the national average, is expected to have stayed above 3% in June but easing from the annual rates in May in two of the three key measures as the government’s fuel subsidies that took effect on May 22 pushed down retail gasoline prices while an earlier slump in crude oil prices led utilities costs lower. The official survey is conducted in mid-month for central areas of the capital.
Easing energy prices have been partially offset by rising processed food prices. The protracted domestic rice supply shortage since last year has kept the retail prices of regular brands double their year-earlier levels. Climate change has been blamed for the recent poor harvest but critics have said regulators are still keeping rice production low to help wholesale rice prices stay high for farmers even after the government officially scrapped their 46-year-old policy in 2018. The government has been releasing its reserves of blended rice produced in 2012 and 2022 but its impact on overall rice prices has been limited.
At its latest meeting on June 16-17, the Bank of Japan’s nine-member board voted unanimously to maintain the target for the overnight interest rate at 0.5% for the third straight meeting after hiking it by 25 basis points (0.25 percentage point) in January amid uncertainty over the trade war and heightened geopolitical risk.
The board decided in an 8 to 1 vote to moderate the JGB purchase reduction pace to by about ¥200 billion a quarter in fiscal 2026 starting in April from by about ¥400 billion now, which will reduce the pace of its JGB buying to around ¥2.1 trillion in January-March 2027 from about ¥4.1 trillion in January-March 2027. Board member Naoki Tamura, a former SMBC banking group executive, called for the same tapering pace of ¥400 billion every quarter into the next fiscal year, arguing that the bank should let markets forces set long-term rates.
The decision is aimed at striking a fine balance between the need to shrink its balance sheet and the need to prevent the lower debt holdings by the central bank from jacking up long-term market interest rates. The BOJ repeated its mantra: Long-term interest rates should be formed in financial markets in principle; it is “appropriate” to trim its JGB purchases ‘in a predictable manner while allowing enough flexibility to support stability in the JGB markets.”
The board maintained the slowing pace of Japanese government bond purchases by about ¥400 billion a quarter for the current fiscal year ending in March 2026 in line with its July 2024 decision to taper JGB buying to around ¥3 trillion in the January-March quarter of 2026 from about ¥6 trillion then (to ¥2.9 trillion from ¥5.7 trillion, to be more precise).
BOJ CAUTIOUS BUT STAYING ON GRADUAL TIGHTENING PATH
The current high inflation rate, neck and neck with Britain on top of the G7 list, is not backed by domestic demand (wage-heavy services price hikes lag behind goods price gains) but largely pushed up by higher import costs. This means that inflation in Japan is not accompanied by sustained and substantial wage growth and that underlying inflation, estimated by the Bank of Japan to be around 1.5%, just below the bank’s 2% price stability target.
In the bigger picture, the bank is in the process of normalizing its policy stance after a decade-long large-scale easing period through 2022 and is set to continue gradually raising the overnight interest rate from the current level of 0.5%. Officials argue that real borrowing costs remain “significantly negative” because the BOJ has been cautious about raising rates even when inflation expectations are rising moderately.
– Friday, June 27
0830 JST (1930 EDT/1630 PDT Thursday, June 26) The Ministry of Internal Affairs and Communications releases May unemployment rate.
Mace News median: 2.5% (range: 2.4% to 2.6%) vs. Apr 2.5%, Mar 2.5%, Feb 2.4%, Jan 2.5%, Dec 2.5%, Nov 2.5%, Oct 2.5%, Sept 2.4%
Japanese payrolls are expected to post their 34th straight rise on year in May amid chronic shortages of construction workers, truck drivers and system engineers. The seasonally adjusted unemployment rate is forecast to remain low and stable at 2.5% after being unchanged in April and edging up to 2.5% in March from 2.4% in February. The 2.4% rate in September 2024 was the lowest in more than four years since 2.4% in February 2020.
The government continues to describe employment conditions as “showing signs of improvement” in its latest monthly economic report for June but real wages fell for the fourth straight month in April in the face of rising costs of living (May wages data are due in early July).
– Friday, June 27
0850 JST (1950 EDT/1650 PDT Thursday, June 26) METI releases preliminary May retail sales.
Mace News median: +2.2% y/y (range +0.5% to +2.3%) vs. Apr revised to +3.5 from +3.3%; -0.2% m/m (range -0.4% to -0.1%) vs. Apr revised to +0.7 from +0.5%
Japanese retail sales are forecast to have slowed down in May, hit by sluggish department store sales, falling fuel prices and a pullback in vehicle sales after a recent recovery. The year-on-year increase is seen decelerating to 2.2% from a revised 3.5% in April. Many department store chains report inbound spending continued falling from a year earlier when the yen was much weaker at around Y156 (vs. Y145 last month) that had boosted purchasing power of visitors from other countries.
On the month, retail sales are expected to post a 0.2% fall, after unexpectedly rising a revised 0.7% in April and surging 1.2% in March.
Last month, the Ministry of Economy, Trade and Industry maintained its assessment after upgrading it in the February report, saying retail sales are “on a gradual pickup trend.”