By Max Sato
In its monthly report for July released Tuesday by the Cabinet Office (later than usual due to the July 20 upper house elections), the government maintained its overview with a slightly brighter undertone, saying the economy is “recovering at a moderate pace, although the effects of the U.S. trade policy are seen in some areas.” Last month, it was “recovering at a moderate pace but confronted by the uncertainty arising from the U.S. trade policy.”
The official assessment was last upgraded in August 2024.
Looking ahead, the government made a slightly positive adjustment to its outlook saying, “the improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the U.S. trade policy needs a close watch.” Last month, it said the protectionist policy stance under Trump was “raising downturn risks to growth.”
“In addition, the effects of continued price increases on private consumption through a downturn in consumer sentiment are also downside risks to the Japanese economy,” it warned. The government repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”
Tokyo and Washington have agreed to lower the “reciprocal” tariff rate to 15% on most U.S. imports of Japanese goods including automobiles and auto parts (50% on iron and steel), down from President Trump’s original plan to slap 25% duties on Japan, but the figure is still much higher than the 2.5% rate imposed by the United States before the second Trump administration.
The two allies have also agreed to work closely together to build strong supply chains in the United States for critical sectors including semiconductors, drugs, steel, shipbuilding, key minerals, air transport, energy, automobiles and artificial intelligence. In the trade deal on building “mutually beneficial” supply chains, Tokyo will spend up to $550 billion by making investments and extending loans from Japan Bank for International Cooperation and providing underwriting by Nippon Export and Investment Insurance.
The bilateral trade deal set the tone for negotiations with Washinton and other U.S. allies, with the 15% tariff rate becoming a new normal and somewhat easing jitters among investors around the world.
Japan’s government vowed to “continue taking all possible measures” to cushion the impact of the Trump tariffs.
The government repeated that with the Bank of Japan it “will continue to work closely together to conduct flexible policy management in response to economic and price developments.” It expects the BOJ “to achieve the price stability target of 2% in a sustainable and stable manner, while confirming the virtuous cycle between wages and prices, by conducting appropriate monetary policy in light of economic activity, prices and financial conditions.”
At its July 30-31 meeting, the BOJ’s nine-member board is widely expected to vote unanimously to maintain the target for the overnight interest rate at 0.5% for the fourth straight time amid uncertainty over trade conflicts and geopolitical risks.
Inflation in Japan has eased slightly but remains sticky at 3.3% in June amid elevated processed food prices, staying the second highest among the Group of Seven major economies after the UK’s 3.6%. The BOJ is in the process of raising interest rates to normalize its overly accommodative policy stance but its pace has been only gradual because economic recovery has been lackluster and years of deflation have been replaced by high inflation, which was triggered by a spike in import costs, not by hotter demand. Therefore, further rate hikes by the BOJ would not be designed to cool off demand and bring inflation down toward its 2% price stability target.
No change in the bank’s policy stance this week would follow the previous meeting on April 30-May 1, when 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 still 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.
The government repeated that the U.S. growth rate is “slowing” after downgrading its assessment for the first time in 33 months in May. Tokyo continues to view the Chinese economy as “pausing” even though there is an increase in supply thanks to the effects of policy measures. It upgraded its view on Thailand for the first time in 26 months, noting “signs of a pickup.”
The Eurozone is “showing signs of a pickup” after the official assessment was upgraded for the first time in 11 months in May.
Key points from the monthly report:
The government maintained its assessment of private consumption that accounts for about 55% of the GDP while noting a slightly improvement in confidence, saying, it is “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is slow to recover.” Previously, it said that consumer spending was “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is in a weak tone.”
The stronger-than-expected gain in May was also backed by a continued post-pandemic pickup in eating out and a surge in demand for air conditioners amid an early arrival of summer heat and humidity. Those two factors likely supported an increase in June.
The government maintained its view on industrial production, which has been “flat.”
In July 31 data, Japan’s industrial production is forecast to be little changed, up just 0.1% on the month in June (forecast range: -1.0% to +0.7%) after being also nearly flat in May with a 0.1% dip (revised down from a slight 0.5% rebound) in the face of lingering global trade conflicts sparked by the protectionist U.S. policy.
Industrial production posted its first drop in three months in April, down 0.9 after a slight 0.2% gain (revised up sharply from -1.1%) in Mach as some effects of the global trade war initiated by President Trump are showing in sluggish export data. The decrease was led by lower output of production machinery (equipment for making flat screen panels, textile and microchips), aircraft parts and metals (bridges, aluminum cans for beverages, etc.)
The monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rebound 5.2% in May, led by production machinery, electric and telecom equipment and vehicles, before slipping back 3.4% in June due to expected pullbacks in vehicles and production machinery.
The government downgraded its assessment of exports for the first time in 12 months after conducting its first upgrade in 18 months in February, saying they are “largely flat.” Previously, exports were “showing signs of a pickup.”
Japanese export values were nearly flat, down 0.5% on the year in June (volumes were up) after falling 1.7% in May, which was the first drop in eight months, as Toyota and other Japanese carmakers are reducing the prices for U.S. customers to cover higher import costs. The decline was led by automobiles and iron/steel, hit by Trump tariffs. Shipments of non-ferrous metals also fell amid slowing global demand.
Import values edged up 0.2% (volumes were also up) following a 7.7% dip in May and coming in firmer than the consensus call of -1.5%. The unexpected increase was driven by higher purchases of drugs, smartphones and semi-conductors, which was partly offset by continued falling prices for crude oil, coal and refined petroleum products.
The trade balance came to ¥153.1billion in surplus, the first positive figure in three months, compared to a revised ¥638.56 billion deficit in May and a ¥221.35 billion surplus in June 2024. It was much narrower than the median economist forecast for a ¥328.45 billion surplus.
Exports to the key U.S. market slumped 11.4% on year, the third straight drop (May -11.0%), hit by autos, drugs, auto parts. Exports to the European Union rose 3.6% for the second straight rise (May +4.9%), led by autos, engines and construction/mining equipment. Shipments to China remain weak, down 4.7%, the fourth straight decline (May -8.8%) on slower demand for non-ferrous metals, chip-making equipment and automobiles.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
Private consumption is “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is slow to recover” vs. “showing signs of a pickup, backed by employment and income conditions, although consumer sentiment is in a weak tone” (wording changed; upgraded in August 2024; downgraded in February 2024).
Business investment is “showing signs of a pickup” (unchanged; upgraded in March 2024; downgraded in November 2023).
Housing construction is “largely flat” (unchanged; upgraded in August 2024’ downgraded in September 2023).
Public investment is “resilient” (unchanged; upgraded in July 2024; downgraded in October 2024).
Exports are “largely flat” vs. “showing signs of a pickup” (the first downgrade in 12 months; upgraded in February 2025; last downgraded in July 2024).
Imports are “showing signs of a pickup” (unchanged; upgraded in May 2025; downgraded in February 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “improving, although attention should be given to the effects of trade issues” (unchanged but added the latter part; upgraded in March 2025; downgraded in December 2024).
Business sentiment is “largely flat” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; downgraded in January 2023).
Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
Domestic corporate goods prices are “showing a slower pace of increase” vs. “rising gradually” (wording changed; last changed in November 2024).
Consumer prices are “rising” (unchanged: last changed in November 2024).