–Government Also Watching Effects of Powerful August Earthquake in Southwestern Region, Damage from Rain Storms Battering Japan Since Last Month
By Max Sato
(MaceNews) – Japan’s government is sticking to its long-held conviction that the moderate economic recovery will continue in the near term, but also warned about rising costs under the protracted Iran war and weak yen as well as the drag from last month’s earthquake and a series of severe rain storms battering many regions for more than a month.
In its monthly report for September released Tuesday by the Cabinet Office, the government maintained its overview, saying that the economy is “recovering at a moderate pace but the impact of the situation in the Middle East and natural disasters needs a close attention.”
On the monetary policy, the report simply stated that the Bank of Japan raised the target for the overnight interest rate to 1.25% from 1% at its Sept. 17-18 meeting. The government repeated its neutral statement that it expects the central bank to “achieve the price stability target of 2% in a sustainable and stable manner while confirming the virtuous cycle between wages and prices.”
The official assessment of industrial production was revised up for the first time in more than two years, backed by the global artificial intelligence boom and the auto sector’s recovery from the initial impact of stiff U.S. tariffs imposed last year. By contrast, the government downgraded its view on public investment but noted that its firm tone should be supported by a slight increase in the public works budget for fiscal 2026 ending next March.
On the near-term outlook, the government repeated, “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 situation in the Middle East and natural disasters needs a close watch.” The government also repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”
The powerful 7.1-magnitude earthquake shook Kumamoto Prefecture in southwestern Japan on July 28, killing 38 people and injuring many more while tearing roads and bridges and cutting off electricity and water supply. More than 71,000 homes were damaged. Two months after the disaster, 1,512 people are still living at evacuation sites. The massive jolt led automakers like Toyota and Honda and chipmakers including Renesas and Tokyo Electron to suspend production in the region for a few days.
In mid-August, massive rain storms killed 13 people and destroyed many homes in Chiba, east of Tokyo, dampening foot traffic at department stores and supermarkets in the prefecture. The region has been battered by two more heavy rains since then. Last week a powerful typhoon ripped through Japan, causing more floods and mudslides. A total of eight people died in Chiba and five more in Kanagawa Prefecture, south of Tokyo, in the wake of the 25th typhoon for the season in Japan. Earlier this month, rain storms flooded the central area of Nagoya, the capital of Aichi Prefecture in central Japan, suspending its subway services and stranding many computers for hours.
In the report, the government noted rising prices of groceries and other necessities are hurting lower income households. Elevated energy and commodities prices as well as high import costs due to the weak yen are prompting firms to raise more retail prices in coming months, it warned.
The government has been providing temporary subsides for electricity and natural gas to help curb utility bills from July through September when extreme summer weather boosts the usage of air conditioners across the country. It has also kept a lid on retail prices of gasoline and other fuels by applying subsides since mid-March in light of the Iran war and scrapping the decades-old gasoline surcharge at the end of 2026.
On other economies, the government maintained its core assessment of global growth. “The world economy continues to show gradual recovery while some regions are showing weakness,” it said, “However, the uncertainty over the global economy including the situation in the Middle East continues.”
Japan sees the U.S. economy as “expanding moderately” after upgrading its view for the first time in more than two years in the June report. The official views are unchanged for the Eurozone, which is “showing signs of a pickup” and for China that is still “slowing gradually.”
Key points from the monthly report:
The government upgraded its view on industrial production for the first time in 28 months, saying it “has shown signs of picking up overall.” In the previous 11 months, it described output as being “flat.”
In data due on Sept. 30, Japan’s industrial production is expected to rebound a solid 1.7% on the month in August, backed by global demand for memory chips used in artificial intelligence development and domestic demand for computers in a widespread digitization move. Production posted its first drop in four months in July (revised down to -0.2% from +0.1%).
Last month, the monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rise a 3.1% on the month in August (adjusted for the statistics’ upward bias), led by chip-making equipment, computers and vehicles. Production was forecast to slip back 4.2% in September.
By contrast, the official assessment of public investment was downgraded for the first time in nine months after having been upgraded in April. It is now “firm,” instead of “solid.”
In the GDP data for the April-June quarter, public works spending fell 0.5% on quarter, marking its third decline in four quarters after rising 1.4% in January-March. The economy grew 0.4% on quarter, or an annualized rate of 1.4%, revised up slightly from the initial reading of a 0.3% gain, or 1.1% annualized as private consumption turned out to be a tad firmer than initially estimated. The decline in business investment in equipment and software was smaller than in the preliminary report but its negative contribution to overall growth was unrevised. Public works spending fell more sharply than initially believed but its effect was also unrevised.
The government maintained its core assessment of private consumption that accounts for about 55% of the GDP, saying that it is “showing signs of a pickup.”
Real average household spending posted its eighth straight year-on-year drop in July, down 3.6% (consensus -2.4%) after a 3.3% dip in May, as consumers remained wary of spending beyond daily necessities and purchases of automobiles took a breather after a recent pickup. On the upside, the heat wave boosted demand for air conditioners and there was higher replacement demand for washing machines. People also paid more on hotels and dining out but that may be partly due to rising fuel, labor and import costs.
Excluding home maintenance and repairs and other volatile items like vehicles and gift money, the core measure fell a smaller 1.4% (up 0.8% in nominal terms) after falling 4.3% (down a nominal 2.5%) the prior month. Autos and related items, a widely fluctuating category, pushed down overall spending by a full percentage point (mostly vehicles) after trimming June expenditures by 0.34 point (mainly lower gasoline prices).
The seasonally adjusted real expenditures index rose 0.5% on the month (consensus +2.6%) to 96.4 in July after plunging a revised 6.3% to 95.9 in June and climbing a revised 3.5% to a 12-month high of 102.4 in May. Recent figures have been revised slightly as the Ministry of Internal Affairs and Communications shifted the base year for household spending to 2025 from 2020 in line with its recent update on the base year and weighting for the consumer price index.
The government also maintained its assessment of exports after upgrading it for the first time in 16 months in June, saying they “have shown signs of a pickup.”
Japanese export values maintained a double-digit percentage gain in August, up 19.3% on the year, as the auto industry has overcome the initial impact of stiff U.S. tariffs slapped last year while global demand for memory chips and non-ferrous metals remains strong. It is their 12th straight increase and follows a 23.2% gain in July that sent exports to a fresh record high of ¥11.51 trillion. The increase was led by automobiles, computer chips and semiconductor-producing equipment, as seen in the prior month.
Import values marked a seventh straight rise, up 28.0%, after soaring a revised 27.9% to score yet another record high of ¥12.15 trillion in July. The Mideast conflict has pushed up energy and transportation costs. The value of the yen, which has firmed in recent weeks, is still below year-earlier levels, keeping Japanese imports expensive. The increase was driven by crude oil, memory chips and computers, as largely seen in recent months.
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 but softer consumer sentiment needs a close watch” (unchanged; upgraded in September 2025; downgraded in February 2024).
Business investment in equipment and software is “picking up” (unchanged; upgraded in April 2026; downgraded in November 2023).
Housing construction “is largely flat” (unchanged; upgraded in August 2026; downgraded in August 2025).
Public investment is “firm” vs. “solid” (the first downgrade in nine months: upgraded in April 2026; last downgraded in December 2025).
Exports are “largely flat” (unchanged; upgraded in June 2026; downgraded in July 2025).
Imports are “largely flat” (unchanged; upgraded in May 2025; downgraded in November 2025).
Industrial production is “showing signs of a pickup overall” vs. “flat” (the first upgrade in 28 months; last upgraded in May 2024; downgraded in October 2024).
Corporate profits are “improving but the Mideast situation needs a close watch” (the first upgrade in six months; upgraded in August 2026; downgraded in August 2025).
Business sentiment is “largely flat but firms are cautious about their outlook and thus the situation in the Middle East needs a close watch” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in June 2026; downgraded in October 2025).
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” (unchanged; wording last changed in August 2026).
Consumer prices are “rising moderately” (unchanged; wording last changed in March 2026).