Outlook for Economic
Activity and Prices
July 2026
Not to be released until 2:00 p.m.
Japan Standard Time on
Monday, August 3, 2026.
.
(English translation prepared by the Bank's staff based on the Japanese original)
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1
Outlook for Economic Activity and Prices (July 2026)
The Bank's View1
Summary
⚫ Japan's economy is expected to continue growing moderately, albeit at a decelerated rate,
in fiscal 2026. This is because, although the rise in crude oil prices since early spring
reflecting the impact of the situation in the Middle East is expected to push down economic
activity, the economy is likely to be underpinned by factors such as the government's
various measures and accommodative financial conditions, in addition to an increase in
global AI-related demand. Japan's economic growth rate is likely to rise moderatel y from
fiscal 2027 onward, since it is projected that the adverse effects of high crude oil prices will
wane and that a virtuous cycle from income to spending will gradually intensify.
⚫ The year-on-year rate of increase in the consumer price index (CPI, all items less fresh
food) is likely to accelerate to a level clearly above 2 percent from the second half of fiscal
2026. This is because, with moves to pass on wage increases to selling prices continuing,
the rise in crude oil prices to date is expected to push up prices, mainly of energy and
goods, and the rise in the prices of semiconductors and other items, reflecting the increase
in global AI-related demand, and the recent depreciation of the yen are likely to lead to an
increase in prices, mainly of dur able goods. Thereafter, with the waning of the effects of
high crude oil prices, the rate of increase is expected to decline toward around 2 percent in
the second half of the projection period. Meanwhile, with a sense of labor shortage
continuing to be strong, it is projected that the mechanism in which wages and prices rise
moderately in interaction with each other will be maintained, and that medium - to
long-term inflation expectations will rise. In this situation, underlying CPI inflation is
expected to increase gradually, coming to a level that is generally consistent with the price
stability target between the second half of fiscal 2026 and fiscal 2027 and remaining at
around that level thereafter.
⚫ Comparing the projections with those presented in the p revious Outlook for Economic
Activity and Prices (Outlook Report), the projected real GDP growth rates are more or less
unchanged. The projected year -on-year rate of increase in the CPI (all items less fresh
food) for fiscal 2026 is lower, due to factors such as the effects of the government's
measures to reduce the household burden of higher energy prices (electricity and gas
charges) during summer.
⚫ There are various risks to the outlook. For the time being, it is necessary to pay particular
attention to the impact of the situation in the Middle East on financial and foreign exchange
markets and on Japan's economic activity and prices. In addition, it is necessary to pay
attention to the effects of developments in global AI -related demand and of future
developments in foreign exchange rates on Japan's economic activity and prices.
⚫ With regard to the risk balance, risks to economic activ ity are generally balanced.
Regarding the outlook for the CPI, risks are skewed to the upside. As for underlying CPI
inflation, there is a risk that it will deviate upward to a level above the price stability target
of 2 percent, given factors such as firms' behavior shifting more toward raising wages and
prices and medium- to long-term inflation expectations continuing to rise. It is necessary to
pay due attention to keep such a risk from materializing and thereby exerting an adverse
impact on the economy afterward.
1 "The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on July 30 and
31, 2026.
2
I. Current Situation of Economic Activity and Prices in Japan
Japan's economy has recovered moderately, although some weakness has been seen in
part, partly due to the impact of the situation in the Middle East. Overseas economies
have grown moderately on the whole, although some weakness has been seen in part.
Exports and industrial production have continued to be more or less flat as a trend.
Against the backdro p of factors such as a solid increase in global AI -related demand,
corporate profits have been at high levels, and business sentiment has also been at a
favorable level. Under these circumstances, business fixed investment has been on a
moderate increasing trend. Private consumption has been resilient against the
background of an improvement in the employment and income situation, although
weakness has been seen in household sentiment. On the other hand, housing investment
has been on a declining trend. Pub lic investment has continued to be more or less flat.
Meanwhile, labor market conditions have remained tight. Financial conditions have been
accommodative. On the price front, with moves to pass on wage increases to selling
prices continuing, the year-on-year rate of increase in the CPI (all items less fresh food)
has recently been at around 1.5 percent due to factors such as the effects of the
government's measures to reduce the household burden of higher energy prices. Inflation
expectations have risen moderately.
II. Baseline Scenario of the Outlook for Economic Activity and Prices in Japan2
A. Baseline Scenario of the Outlook for Economic Activity
In fiscal 2026, although the rise in crude oil prices since early spring reflecting the impact
of the situation in the Middle East is expected to push down corporate profits and
households' real income through factors such as a deterioration in the terms of trade,
Japan's economy is likely to be underpinned by factors such as the government's various
measures (e.g., measures to reduce the household burden of higher energy prices) and
accommodative financial conditions, in addition to an increase in global AI -related
demand and solid wage increases achieved in the annual spring labor-management wage
negotiations. Against this backdrop, Japan's economy is expected to continue growing
moderately, albeit at a decelerated rate.
In the corporate sector, exports and production, despite the impact of the situation in the
Middle East, are likely to be more or less fl at for the time being , pushed up by strong
global AI-related demand. Corporate profits, despite the impact of the deterioration in the
terms of trade reflecting the rise in crude oil prices, are likely to remain at high levels on
2 Each Policy Board member makes their forecasts taking into account the effects of past policy decisions
and with reference to views incorporated in financial markets regarding the future conduct of policy.
Based, for example, on developments in futures markets, Dubai crude oil prices are expected to decline
from around 80 U.S. dollars per barrel to around 70 dollars per barrel toward t he end of the projection
period.
3
the back of factors such as strong AI -related demand. In this situation, business fixed
investment is expected to remain on a moderate increasing trend , as the government's
economic measures and accommodative financial conditions, together with firms' moves
to clear order backlogs from existing projects, are expected to provide support.
In the household sector, regarding the employment situation, labor market conditions are
likely to remain tight, and the growth in nominal wages is projected to remain at around its
current pac e, mainly reflecting the outcome of this year's annual spring
labor-management wage negotiations. Private consumption is expected to be more or
less flat due to the impact of price rises, particularly in energy prices, although it is likely to
be underpinned by income transfers to households through the government's various
measures, in addition to wage increases and the wealth effects from higher stock prices.
Housing investment is expected to follow a moderate declining trend, mainly reflecting a
rise in housing prices and demographic developments. Meanwhile, public investment is
expected to be more or less flat, and government consumption is expected to increase
moderately reflecting factors such as an uptrend in healthcare and nursing care
expenditures and a rise in defense-related spending.
From fiscal 2027 onward, Japan's economic growth rate is expected to rise moderately,
since it is projected that the adverse effects of high crude oil prices will wane and that the
virtuous cycle from income to spending will gradually intensify. Exports and production are
likely to increase moderately, partly supported by factors such as strong global AI-related
demand, as the impact of the situation in the Middle East eases and overseas economies
continue to grow mode rately. Corporate profits are likely to improve, supported by an
improvement in the terms of trade reflecting a decline in crude oil prices and by an
increase in domestic and external demand. In this situation, business fixed investment is
likely to remain on an upward trend, pushed up by labor -saving investment to address
labor shortages, investment in growth areas, such as AI -related areas, for capacity
expansion, and investment projects to adapt to changes in the trade structure and supply
chains, among other investments. Looking at the employment and income situation, labor
market conditions are likely to remain tight, and nominal wages are expected to continue
increasing steadily. In addition, with the pace of price rises expected to moderate
gradually, private consumption is projected to return to a moderate increasing trend.
Comparing the projections with those presented in the previous Outlook Report, the
projected real GDP growth rates are more or less unchanged throughout the projection
period.
4
Meanwhile, the potential growth rate is expected to remain slightly positive. 3 This is
mainly because productivity is likely to increase due to advances in digitalization and
investment in human capital, and because capital stock is projected to increase stea dily.
Potential growth is likely to be supported by the government's various measures and other
factors.
B. Baseline Scenario of the Outlook for Prices
The year -on-year rate of increase in the CPI (all items less fresh food) is likely to
accelerate to a level clearly above 2 percent from the second half of fiscal 2026. This is
because, with moves to pass on wage increases to selling prices continuing, the rise in
crude oil prices to date is expected to push up prices, mainly of energy and goods, and
the rise in the prices of semiconductors and other items, reflecting the increase in global
AI-related demand, and the recent depreciation of the yen are likely to lead to an increase
in prices, mainly of durable goods. Thereafter, with the waning of the effects of high crude
oil prices, the rate of increase is expected to decline toward around 2 percent in the
second half of the projection period.
Meanwhile, with a sense of labor shortage continuing to be strong, it is projected that the
mechanism in which wages and prices rise moderately in interaction with each other will
be maintained, and that medium - to long -term inflation expectations will rise. In this
situation, underlying CPI inflation is expected to increase gradually, coming to a level that
is generally consistent with the price stability target between the second half of fiscal 2026
and fiscal 2027 and remaining at around that level thereafter. Given that underlying CPI
inflation has been approaching 2 percent, it will be import ant, f rom the perspective of
sustainable and stable achievement of the price stability target, to examine whether it
becomes anchored at a level around 2 percent.
The outlook for the CPI (all items less fresh food) is also affected by developments in
crude oil prices and the effects of the government's various measures. Crude oil prices
are assumed to decline moderately toward the end of the projection period, based, for
example, on developments in futures markets. However, considering the increase in
transportation costs associated with the securing of alternative sources of supply from
regions other than the Middle East, it is projected that the procurement costs faced by
Japanese firms will not decline as much as international market prices. Regarding
government measures, those to reduce the household burden of higher en ergy prices,
such as fuel oil subsidies, and policies concerning the provision of free education, among
3 Under a specific methodology, Japan's recent potential growth rate is estimated to be around 0.5-1.0
percent. However, the rate should be interpreted with considerable latitude. This is because the estimate
is subject to change depending on the methodologies employed and could be revised as the sample
period becomes longer over time. In addition, there are high uncertainties over how factors such as
advances in digitalization will affect the trends in productivity or labor supply.
5
other initiatives, are being implemented, and these are expected to exert downward
pressure on the year-on-year rate of increase in the CPI in fiscal 2026.
Looking at the CPI (all items less fresh food and energy) -- which is not directly affected by
fluctuations in energy prices -- the year-on-year rate of increase is likely to be at a level
exceeding 2 percent. This is because the rise in crude oil pric es to date is expected to
push up prices, mainly of goods, and the rise in the prices of semiconductors and other
items and the recent depreciation of the yen are likely to lead to an increase in prices,
mainly of durable goods . Thereafter, the rate of inc rease in this CPI is likely to decline,
with the waning of the effects of high crude oil prices.
Comparing the projections with those presented in the previous Outlook Report, the
projected year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2026
is lower, due to factors such as the effects of the government's measures to reduce the
household burden of higher energy prices (electricity and gas charges) during summer ,
while the projected year-on-year rates of increase in the CPI (all items less fresh food and
energy) are more or less unchanged throughout the projection period.
The main factors that determine underlying inflation are assessed as follows. The output
gap, which captures the utilization of labor and capital, has follow ed an improving trend,
albeit with fluctuations, and has been slightly positive recently. Based on the
aforementioned outlook for economic activity, the output gap is likely to remain positive at
around its current level. Meanwhile, labor market conditions have tightened to a greater
extent than can be explained by the changes in the output gap, partly due to a
deceleration in the pace of increase in labor force participation of women and seniors. In
this situation, upward pressure on wages and prices likel y has become stronger than
suggested by the output gap, given that firms -- particularly in labor-intensive industries --
have started to face labor supply constraints.
Medium- to long-term inflation expectations have risen moderately. Regarding the outlook,
as firms' active wage - and price-setting behavior is expected to continue on the back of
factors such as the tightening of labor market conditions, inflation expectations are likely
to continue to rise moderately. Medium - to long-term inflation expectations are expected
to come to a level around 2 percent between the second half of fiscal 2026 and fiscal 2027
and remain at around that level thereafter.
III. Risks to Economic Activity and Prices
Regarding the aforementioned baseline scenario of the outlook for economic activity and
prices, the main upside and downside risks that require attention are as follows.
The first is the impact of the situation in the Middle East on Japan's economic activity and
prices. While the situation in the Middle East remains unclear, crude oil prices have
6
declined compared with a while ago. As a result, the significant downside risks to
economic activity and the significant upside risks to prices, both of which were pointed out
in the previous Outlook Repor t, have decreased. In particular, the risk that large -scale
disruptions in supply chains will occur, exerting a significant impact on the production
activity of Japanese firms, has decreased, partly due to progress in securing alternative
sources of supply for raw materials that are highly dependent on the Middle East.
However, attention continues to be warranted on the impact of the rise in crude oil prices
to date on economic activity and prices. On the real economy front, it is necessary to
monitor whether price rises for raw materials and other items reflecting high crude oil
prices will push down corporate profits and households' real income to a greater extent
than expected. On the price front, the price pass -through stemming from high crude oil
prices has been progressing at a relatively fast pace in business-to-business transactions,
which is highly likely to spread to an increase in consumer prices across a wide range of
items. In addition to these factors, taking into account that medium - to long-term inflation
expectations have also continued to rise, there is a risk of underlying CPI inflation
deviating upward to a level above the price stability target of 2 percent.
Meanwhile, crude oil prices have continued to see large fluctuations. Attention co ntinues
to be warranted on how changes in crude oil prices will affect Japan's economic activity
and prices.
The second risk is developments in economic activity and prices at home and abroad,
including AI-related demand. Regarding AI, amid the continued increase in global demand
alongside the r apid expansion in the range of AI applications, strong business fixed
investment could further push up the global economy. On the other hand, if profits do not
expand in line with such investment, adjustment pressure could arise, accompanied by,
for example, changes in asset prices. On the price front, the recent rise in semiconductor
prices is likely to push up the price of related durable goods. Moreover, the prices of
copper and other materials as well as machinery prices have also risen in
business-to-business transactions. Looking ahead, there is a possibility that these
developments could lead to an increase in consumer prices across a variety of items.
Should such domestic and external demand for AI -related materials and parts increase
more than expected, there is also a risk that upward pressure on prices will further
heighten. In addition, while the positive impact of the expansion in AI-related demand has
so far been observed mainly in areas such as revenue growth in the IT-related sector and
the wealth effects from higher stock prices, it is necessary to pay attention to whether the
benefits will spread across a wide range of sectors through, for example, enhanced
productivity associated with the use of AI.
Moreover, attention also needs to be paid to the impact that developments such as recent
moves toward fiscal expansion in various economies, including in the United States and
Europe, have on global economic activity and prices as well as financial markets.
7
Regarding the Chinese economy, there remain high uncertainties surrounding the future
pace of growth, as adjustment pr essure has continued in the real estate and labor
markets. In addition, it is necessary to pay attention to how excessive supply capacity for
some goods will affect global economic activity and prices.
The third risk is the effects of developments in foreign exchange rates on Japan's
economic activity and prices. There are various possible channels in this regard. While a
depreciation of the yen would have a positive impact on, for example, the profits of global
firms, it would also push down households' real income and exert downward pressure on
the profits particularly of small and medium -sized firms, mainly through a rise in import
prices. Attention should also be paid to the point that, with firms' behavior shifting more
toward raising wages and prices recently, exchange rate developments are, compared to
the past, more likely to affect prices, and that such moves could affect underlying CPI
inflation through changes in inflation expectations. In this context, the year-on-year rate of
increase in import prices has recently risen substantially due to the depreciation of the yen
as well as developments in commodity prices, such as high crude oil prices. The impact of
this rise requires due attention, since it is expected to push up the prices of a wide range
of items, including durable goods.
In addition to these risks, a risk considered from a somewhat long-term perspective is the
impact of various changes in the environment surrounding Japan on firms' and
households' medium- to long-term growth expectations and on Japan's potential growth
rate. Intensifying labor shortages -- which are partly due to structural demographic
changes -- could accelerate labor -saving investment, such as for digitalization and the
use of AI, and this, together with efforts taken by the government to increase investment in
growth areas, could push up growth expectations and the potential growth rate. In this
regard, many have pointed out that investment has been constrained by factors such as
the surge in material prices , in addition to labor shortages. Taking this into account,
achieving price stability through the appropriate conduct of monetary policy is also
important from the perspective of supporting the expansion of growth investment in Japan.
On the other hand, at tention is warranted on the risk that, if the substitution of labor with
capital does not sufficiently progress in an economy facing labor shortages, supply -side
constraints will push down the growth rate. Meanwhile, the trade policies announced so
far in each jurisdiction have partly led to a change in the trend of globalization, and
depending on the future course of these policies, this change may accelerate.
8
IV. Conduct of Monetary Policy
In the context of the price stability target, the Bank assesses the aforementioned
economic and price situation from two perspectives and then outlines its thinking on the
future conduct of monetary policy.4
The first perspective involves an examination of the baseline scenario of the outlook. The
year-on-year rate of increase in the CPI (all items less fresh food) is likely to accelerate to
a level clearly above 2 percent from the second half of fiscal 2026. This is because, with
moves to pass on wage increases to selling prices continuing, the rise in crude oil prices
to date is expected to push up prices, mainly of energy and goods, and the rise in the
prices of semiconductors and other items, reflecting the increase in global AI -related
demand, and the recent depreciation of the yen are likely to lead to an increase in prices,
mainly of durable goods. Thereafter, with the waning of the effects of high crude oil prices,
the rate of increase is expected to decline toward around 2 percent in the second half of
the projection period. Meanwhile, with a sense of labor shortage continuing to be strong, it
is projected that the mechanism in which wages and prices rise moderately in interaction
with each other will be maintained, and that medium - to long-term inflation expectations
will rise. In this situati on, underlying CPI inflation is expected to increase gradually,
coming to a level that is generally consistent with the price stability target between the
second half of fiscal 2026 and fiscal 2027 and remaining at around that level thereafter.
Given that the level of the policy interest rate has risen compared to the past, it is also
important to examine how financial conditions change under such circumstances. In this
regard, real interest rates have been negative, mainly in the short- to medium-term zone,
and firms' funding costs have remained sufficiently low relative to profitability on the whole.
Meanwhile, firms' and other entities' demand for funds has inc reased, and financial
institutions' lending attitudes have also remained proactive. Moreover, issuance
conditions for CP and corporate bonds have remained favorable. In light of these
developments, Japan's financial conditions have remained accommodative a nd are
expected to continue to firmly support economic activity.
The second perspective involves an examination of the risks considered most relevant to
the conduct of monetary policy. There are various risks surrounding Japan's economic
activity and price s. For the time being, it is necessary to pay particular attention to the
impact of the situation in the Middle East on financial and foreign exchange markets and
on Japan's economic activity and prices. In addition, it is necessary to pay attention to the
effects of developments in global AI -related demand and of future developments in
foreign exchange rates on Japan's economic activity and prices. With regard to the risk
4 As for the examination from two perspectives in the context of the price stability target, see the Bank's
statement released on January 22, 2013, entitled "The 'Price Stability Target' under the Framework for the
Conduct of Monetary Policy."
9
balance, risks to economic activity are generally balanced. Regarding the outlook for the
CPI, risks are skewed to the upside. As mentioned earlier, with underlying CPI inflation
approaching 2 percent , there is a risk that it will deviate upward to a level above the 2
percent price stability target, given factors such as firms' behavior sh ifting more toward
raising wages and prices and medium - to long-term inflation expectations continuing to
rise. It is necessary to pay due attention to keep such a risk from materializing and
thereby exerting an adverse impact on the economy afterward.
Examining risks on the financial side, financial intermediation activities, such as lending,
have operated smoothly, and no major financial imbalances have been seen in current
financial activities, although attention continues to be warranted on developments in asset
prices, such as real estate and stock prices . Japan's financial system has maintained
stability on the whole. Even in the case of an adjustment in the real economy at home and
abroad and in global financial markets, the financial system is likely to remain highly
robust on the whole, mainly because Japanese financial institutions have sufficient capital
bases. In this regard, it is necessary to carefully monitor the impact that factors such as
the future situation in the Middle East, the profitability of AI -related investment, and
developments in the foreign non -bank financial intermediary (NBFI) sector have on t he
financial system through various channels.
As for the conduct of monetary policy , given that underlying CPI inflation has been
approaching 2 percent and financial conditions have been accommodative, th e Bank will
continue to raise the policy interest rate and adjust the degree of monetary
accommodation, in response to developments in economic activity and prices as well as
financial conditions. In this regard, it will consider the timing and pace of adjustment, while
examining the likelihood of realizing the baseline scenario of the outlook for economic
activity and prices and the risks to the outlook, including the impact of the situation in the
Middle East, the expansion in AI-related demand, and developments in foreign exchange
rates. In particular, the perspective of stabilizing underlying CPI inflation at a level around
2 percent becomes important in order to keep the risk of underlying CPI inflation deviating
upward to a level above the price stability target of 2 percent from materializing and
thereby exerting an adverse impact on the economy afterward. With the price stability
target of 2 percent, the Bank will conduct monetary policy as appropriat e from the
perspective of sustainable and stable achievement of the target.
10
(Appendix)
Forecasts of the Majority of the Policy Board Members
y/y % chg.
Real GDP CPI (all items less
fresh food)
(Reference)
CPI (all items less
fresh food and energy)
Fiscal 2026 +0.6 to +0.7
[+0.6]
+2.3 to +2.7
[+2.5]
+2.3 to +2.6
[+2.5]
Forecasts made in April 2026 +0.4 to +0.7
[+0.5]
+2.8 to +3.0
[+2.8]
+2.5 to +2.7
[+2.6]
Fiscal 2027 +0.7 to +0.8
[+0.8]
+2.2 to +2.5
[+2.4]
+2.2 to +2.7
[+2.6]
Forecasts made in April 2026 +0.6 to +0.8
[+0.7]
+2.3 to +2.4
[+2.3]
+2.6 to +2.7
[+2.6]
Fiscal 2028 +0.7 to +0.8
[+0.8]
+2.0 to +2.2
[+2.0]
+2.1 to +2.3
[+2.2]
Forecasts made in April 2026 +0.7 to +0.8
[+0.8]
+2.0 to +2.2
[+2.0]
+2.1 to +2.4
[+2.2]
Notes: 1. Figures in brackets indicate the medians of the Policy Board members' forecasts (point estimates).
2. The forecasts of the majority of the Policy Board members are constructed as follows: each Policy Board
member's forecast takes the form of a point estimate -- namely, the figure to which they attach the highest
probability of realization. These forecasts are then shown as a range, with the highest figure and the lowest figure
excluded. The range does not indicate the forecast errors.
3. Each Policy Board member makes their forecasts taking into account the effects of past policy decisions and with
reference to views incorporated in financial markets regarding the future conduct of policy.
11
-0.5
0.0
0.5
1.0
1.5
2.0
-0.5
0.0
0.5
1.0
1.5
2.0
2021 2022 2023 2024 2025 2026 2027 2028 2029
y/y % chg. y/y % chg.
FY
1.0
1.5
2.0
2.5
3.0
3.5
1.0
1.5
2.0
2.5
3.0
3.5
2021 2022 2023 2024 2025 2026 2027 2028 2029
y/y % chg. y/y % chg.
FY
Policy Board Members' Forecasts and Risk Assessments
(1) Real GDP
(2) CPI (All Items Less Fresh Food)
Notes: 1. The solid lines show actual figures, while the dotted lines show the medians of the Policy Board
members' forecasts (point estimates).
2. The locations of , △, and ▼ in the charts indicate the figures for each Policy Board member's forecasts
to which they attach the highest probability. The risk balance assessed by each Policy Board member is
shown by the following shapes: indicates that a member assesses "upside and downside risks as
being generally balanced," △ indicates that a member assesse s "risks are skewed to the upside," and ▼
indicates that a member assesses "risks are skewed to the downside."
12
The Background5
I. Current Situation of Economic Activity
and Its Outlook
A. Economic Developments
Japan's economy has recovered moderately,
although some weakness has been seen in part,
partly due to the impact of the situation in the
Middle East.
The real GDP growth rate for the January -March
quarter of 2026 was 0.5 percent on a
quarter-on-quarter basis and 1.8 percent on an
annualized basis, registering positive growth for
two consecutive quarters (Chart 1). By demand
component, (1) although business fixed
investment turned to a decline reflecting delays in
the progress of construction projects due to labor
shortages and a surge in material prices, (2)
private consumptio n continued to increase
against the background of an improvement in real
disposable income, and (3) exports also
increased firmly, mainly in goods, on the back of a
solid increase in AI -related demand, with the
impact of the increase in tariffs last year h aving
largely subsided. In this situation, labor market
conditions have continued to be tight, and the
output gap -- which captures the utilization of
labor and capital -- was at around 0.5 percent in
the January-March quarter (Chart 2).6
5 "The Background" provides explanations of "The Bank's View"
decided by the Policy Board at the Monetary Policy Meeting held
on July 30 and 31, 2026.
6 The output gap and the potential growth rate should be
interpreted with considerable latitude because th ey are estimated
based on specific assumptions regarding trends in production
factors. For details on the estimation method, see the following
paper: Research and Statistics Department, Bank of Japan,
"Updates on the Output Gap and Potential Growth Rate, and
Monitoring Labor Market Indicators," Bank of Japan Research
Paper (June 2026).
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
21 22 23 24 25 26
Imports
Exports
Other domestic demand
Private nonresidential investment
Private consumption
Real GDP
s.a., ann., q/q % chg.
2. Annualized Quarterly Growth Rate
Source: Cabinet Office.
CY
500
520
540
560
580
600
11 13 15 17 19 21 23 25
s.a., ann., tril. yen
Chart 1: Real GDP
CY
1. Level
13
Monthly indicat ors, high -frequency data, and
anecdotal information from firms since April
suggest that the decline in imports of raw
materials and the rise in energy and raw material
prices, both reflecting the situation in the Middle
East, have adverse effects on certai n areas of
exports and production and on sentiment;
however, domestic and external demand has
remained resilient, as large -scale disruptions in
supply chains have been avoided owing to
progress in securing alternative sources of supply,
while the solid inc rease in global AI -related
demand has also provided support.7 Exports and
production have continued to be more or less flat
as a trend. This is because, while the decline in
exports and production of intermediate goods
(e.g., chemicals) reflecting bottlenecks in logistics
has been only small, exports and production of
capital goods and IT -related goods have
increased on the back of solid global AI -related
demand. Against this backdrop, corporate profits
appear to have been at high levels, and the June
Tankan (Short-Term Economic Survey of
Enterprises in Japan) shows that the diffusion
index (DI) for business conditions for all industries
and enterprises has remained at the most
favorable level since August 1991, as in the
previous survey. While firms -- as shown in the
June Tankan -- have maintained their active
business fixed investment stance, shortages in,
and the rise in prices of, construction materials
reflecting the situation in the Middle East, coupled
with ongoing labor shortages, appear to have led
to delays in the progress of construction
investment in certain projects. In the household
sector, while indicators of consumer sentiment
have continued to show weakness, private
7 See Box 1 for developments in raw materials imports in
response to the situation in the Middle East.
-40
-30
-20
-10
0
10
20
30
40-5
-4
-3
-2
-1
0
1
2
3
4
5
85 90 95 00 05 10 15 20 25
Output gap (left scale)
Tankan factor utilization
index (right scale)
% inverted, DI ("excessive" - "insufficient"), % points
Chart 2: Output Gap
Source: Bank of Japan.
Notes: 1. Figures for the output gap are staff estimates.
2. The Tankan factor utilization index is calculated as the weighted average of the
production capacity DI and the employment conditions DI for all industries and
enterprises. The capital and labor shares are used as weights. There is a
discontinuity in the data for December 2003 due to a change in the survey
framework.
3. Shaded areas denote recession periods.
CY
14
consumption has increased recently, pushed up
by the government's various su pport measures,
the wealth effect s from higher stock prices, and
the front-loading of demand for some goods, as
well as the increase in the number of employees
and in nominal wages. In reflection of the
aforementioned developments in domestic and
external demand, the employment conditions DI
for all industries and enterprises in the June
Tankan continued to show net "insufficient
employment" at about the same level as in the
early 1990s, particularly in nonmanufacturing. As
a result, the weighted average DI for production
capacity and employment conditions also
continued to show a significantly large net
"insufficient" (Chart 2). As explained, although the
adverse effects reflecting the situation in the
Middle East have been observed in part, Japan's
economy has been underpinned by the positive
effects of factors such as solid global AI -related
demand, the increase in stock prices, and the
government's various support measures.
With regard to the outlook, Japan's economic
growth is likely to decelerate somewhat for a time.
This is because, although solid global AI -related
demand and the government's various measures
are likely to provide support, the economy is
expected to be pushed down by the deterioration
in the terms of trade reflecting the rise in energy
and raw material prices. In addition, attention is
warranted on the possibility that production,
particularly o f transport equipment and of
electronic parts and devices, could be pushed
down in the near term due to supply -side
constraints from the 2026 Kumamoto Earthquake.
Thereafter, based on the assumption that crude
oil prices will continue on a declining trend,
15
Japan's economic growth rate is likely to rise
moderately, partly supported by the solid increase
in global AI-related demand, and be at around the
same level as the potential growth rate. 8
Comparing the projections with those presented
in the previous Outlook Report, the projected real
GDP growth rates are more or less unchanged.
The estimate of the potential growth rate has
been around 0.5 -1.0 percent since the recovery
from the COVID-19 pandemic, and it is expected
to remain at around that level (Chart 3). The
breakdown of the outlook for the potential growth
rate is as follows: (1) although the decline in
potential working hours will come to a halt
reflecting the diminishing effects of working -style
reforms, the growth in potential labor input will be
slightly negative, since the labor force
participation of women and seniors will gradually
level off and growth in the number of potential
workers will decelerate; (2) capital stock will
continue to increase steadily, partly supported by
the government's various measures, although the
pace of increase will decelerate, reflecting the
rising share of intangible fixed asset investment,
for which economic value depreciates quickly;
and (3) growth in total factor productivity (TFP)
will remain positive at around its current level,
supported by an improvement in productivity due
to the use of tools such as AI and by more
efficient reallocation of production factors. Based
on the aforementioned projections of economic
developments and the potential growth rate, it is
expected that the output gap will remain positive
at around its current level throughout the
projection period.
8 See Box 2 for the impact of increased global AI-related demand
on Japan's economy.
-2
-1
0
1
2
3
4
5
85 90 95 00 05 10 15 20 25
Total factor productivity
Capital input
Labor input
Potential growth rate
Chart 3: Potential Growth Rate
y/y % chg.
FY
Source: Bank of Japan.
Note: Figures are staff estimates.
16
Details of the outlook for each fiscal year are as
follows. In fiscal 2026, Japan's economic growth
is likely to decelerate somewhat from the previous
fiscal year. This is because it is projected that,
while exports will follow a moderate increasing
trend on the back of solid global AI -related
demand, the growth momentum in domestic
private demand will decelerate, as the rise in
energy and raw material prices leads to a pushing
down of corporate profits and a decline in
households' real purchasing power. However, in
addition to a buffer from high levels of corporate
profits, which have been further boosted by
factors such as higher export prices for AI-related
goods, Japan's economy is likely to be
underpinned by the government's measures and
accommodative financial conditions, and the
decline in the economic growth rate is thus
expected to be only small. Goods exports are
likely to remain more or less flat for the time being
due to downward pressure on exports of
intermediate goods and other items reflecting the
impact of the situation in the Middle East;
however, as the impact of the situation in the
Middle East eases, goods exports are expected to
follow a moderate increasing trend, mainly led by
AI-related goo ds. Business fixed investment is
likely to follow an upward trend, underpinned by
factors such as moves to clear order backlogs for
existing investment projects, in addition to
investment in AI -related areas for capacity
expansion. That said, for the time being, the
growth momentum in business fixed investment is
likely to remain subdued due to the impact of the
slower growth in corporate profits reflecting higher
energy and raw material prices, the rise in
construction costs, and delays in construction
projects. N ominal wages are highly likely to
continue rising steadily, with base pay increases
17
being realized generally at around the same level
as in 2025, and due to the impact of higher wages
of part-time employees reflecting minimum wage
increases. The nu mber of employees is also
highly likely to continue increasing moderately. In
addition to such increases in employee income
and the government's various measures such as
those to reduce the household burden of higher
energy prices, the front -loading of dem and for
durable goods is also likely to push up private
consumption, which is expected to increase
moderately for the time being; however, private
consumption is highly likely to slow toward the
second half of the fiscal year, as price rises are
expected to exert increased downward pressure
on real purchasing power. Meanwhile, housing
investment is likely to follow a declining trend,
mainly reflecting the rise in housing prices and
demographic developments.
In fiscal 2027, Japan's economic growth is likely
to accelerate somewhat to around the same level
as the potential growth rate. This is because it is
expected that, while downward effects due to
price rises will remain, particularly in the first half
of the fiscal year, the increasing trend in domestic
private demand will gradually become more
pronounced, supported by an improvement in
trading gains due to elevated export prices for
AI-related goods and a decline in crude oil prices.
Goods exports are expected to follow a moderate
increasing trend, mainly led by AI -related goods,
as the impact of the situation in the Middle East
eases. Corporate profits are likely to remain on an
uptrend against the background of the increase in
domestic and external demand and the decline in
energy and raw material prices . In this situation,
business fixed investment is likely to remain on an
18
upward trend, pushed up by labor -saving
investment to address labor shortages,
investment in AI -related areas for capacity
expansion, and investment projects to adapt to
changes in the trade structure and supply chains,
among other investments. The rate of increase in
nominal wages is likely to decelerate somewhat,
pushed down by the earlier slowdown in growth
momentum in corporate profits with a time lag.
Private consumption is likely to remain more or
less flat due to factors such as the waning of the
effects of the government's support measures
implemented through 2026 and the reactionary
decline following the front -loading of demand for
durable goods, although a recovery in real
disposable income, reflecting a decline in the
inflation rate, is expected to underpin private
consumption.
In fiscal 2028, Japan's econom ic growth is likely
to remain at a pace around the same level as the
potential growth rate, with crude oil prices
projected to remain more or less flat. Goods
exports are expected to continue increasing
moderately against the backdrop of moderate
growth in overseas economies. With a continued
improvement in corporate p rofits, business fixed
investment is likely to remain on a steady upward
trend. Employee income is likely to increase firmly,
as growth in nominal wages accelerates again
reflecting the improvement in corporate profits. In
this situation, private consumpti on is expected to
return to a moderate increasing trend, as real
disposable income continues to improve.
19
B. Developments in Major Expenditure
Items and Their Background
Government Spending
Public investment has continued to be more or
less flat (Chart 4). While construction based on
the government's economic measures, including
construction related to building national resilience,
has progressed, the amount of public investment
(in real terms) has continued to be more or less
flat when fluctuatio ns are smoothed out. The
amount of public construction completed (in
nominal terms) -- a coincident indicator of public
investment -- has been on a moderate increasing
trend, reflecting a rise in construction costs.
Considering the developments in variou s leading
indicators, public investment is likely to be more
or less flat. Government consumption is projected
to continue increasing steadily, reflecting an
increase in spending on the government's
economic measures and a rise in defense-related
spending, in addition to an uptrend in healthcare
and nursing care expenditures.
Overseas Economies
Overseas economies have grown moderately on
the whole, although some weakness has been
seen in part, partly due to the impact of the
situation in the Middle East (Chart 5). By region,
the U.S. economy has maintained solid growth on
the whole, although some weakness has been
seen in part. European economies have remained
resilient on the whole, but downward pressure on
domestic demand has been observed reflecting
the impact of the situation in the Middle East. The
Chinese economy has picked up recently, mainly
25
26
27
28
29
30
31
32
33
19
20
21
22
23
24
25
26
27
16 17 18 19 20 21 22 23 24 25 26
Public construction completed (nominal, left scale)
Public investment (real, right scale)
Chart 4: Public Investment
s.a., ann., tril. yen s.a., ann., tril. yen
Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2026/Q2 is the April-May average.
CY
-8
-6
-4
-2
0
2
4
6
8
10
95 00 05 10 15 20 25
Overseas total
Advanced economies
Emerging and commodity-exporting
economies
Chart 5: Overseas Economies
y/y % chg.
CY
IMF
projections
Sources: IMF; Ministry of Finance.
Note: Figures are the weighted averages of real GDP growth rates using countries' share
in Japan's exports as weights. The real GDP growth rates are compiled by the IMF,
and the rates from 2026 onward are its projections in the April 2026 World
Economic Outlook (WEO) and the July 2026 WEO Update. Figures for advanced
economies are those for the United States, the euro area, and the United Kingdom.
Figures for emerging and commodity-exporting economies are those forthe rest of
the world.
20
supported by an increase in exports, although
consumption has lacked momentum. Growth in
emerging and commodity -exporting economies
other than China has improved moderately on the
whole, although some weakness has been seen
in part. Among those in Asia, which have close
links to Japan's economy, the NIEs and ASEAN
economies have improved, driven by global
AI-related demand; however, consumption and
production have been affected in part, reflecting
the situation in the Middle East.
Looking at the Global PMI to see the current
situation for the global economy, figures for the
services industry declined, affected by the
situation in the Middle East, but have recently
been slightly above 50, the break -even point
between improvement and deterioration in
business conditions. Meanwhile, figures for the
manufacturing industry have remained above 50
(Chart 6).
As for the outlook, overseas economies are
expected to come under downward pressure for
the time being due to the impact of factors such
as the situation in the Middle East . Thereafter,
however, based on the assumption that the
impact of the situation in the Middle East will ease,
overseas economies are proje cted to continue
growing moderately, partly supported by global
AI-related demand. B y region, the impact of the
situation in the Middle East is likely to exert
downward pressure for the time being, mainly on
Asian economies, which are highly dependent on
energy imports from the Middle East. Thereafter,
based on the assumption that the impact of the
situation in the Middle East will ease, the U.S.
20
25
30
35
40
45
50
55
60
11 13 15 17 19 21 23 25
Manufacturing
Services
Chart 6: Global PMI
s.a., DI
Source: Copyright © 2026 by S&P Global Market Intelligence, a division of S&P Global
Inc. All rights reserved.
Note: Figures for manufacturing are the J.P.Morgan Global Manufacturing PMI. Figures
for services are the J.P.Morgan Global Services Business Activity Index.
CY
20
40
60
80
100
120
140
160
180
200
80 85 90 95 00 05 10 15 20 25
Real effective exchange rate
Nominal effective exchange rate
Source: BIS.
Note: Figures are based on the broad effective exchange rate indices. Figures prior to
1994 are calculated using the narrow indices.
Chart 7: Effective Exchange Rates
CY 2020=100
Yen
appreciation
Yen
depreciation
CY
21
economy is expected to continue growing firmly,
partly reflecting AI -related demand and support
from economic policies. European economies are
projected to see a gradual acceleration in their
growth rate, partly reflecting support from
economic policies. The Chinese economy is likely
to improve moderately, partly reflecting support
from economic policies. Emerging and
commodity-exporting economies other than China
are likely to improve moderately, partly supported
by global AI-related demand.
Exports and Imports
Exports have continued to be more or less flat as
a trend, with downward effects from the situation
in the Middle East and upward effects from global
AI-related demand largely offsetting each other
(Chart 8). 9 By region, exports to the United
States have increased, boosted by factors such
as an increase in exports of capital goods for data
centers, in addition to an increase in exports of
automobile-related goods reflecting the
resumption of production lines at some
automakers (Chart 9). Exports to Europe have
increased, especially of automobile-related goods,
reflecting resilient domestic demand in the region
and the effects of the introduction of new car
models. Exports to China have remained at a low
level, d ue to greater local production of
automobiles, IT-related goods, and other products
by Chinese manufacturers reflecting their
increased competitiveness, and pushed down by
the peaking -out of demand for semiconductor
production equipment. Although exports t o the
NIEs, ASEAN, and some other Asian economies
9 Real exports excluding "other goods" have also been more or
less flat , where "other goods" include , for example, re-export
goods that are not recorded in the GDP statistics.
70
80
90
100
110
120
130
11 13 15 17 19 21 23 25
Real exports
Real exports (except other goods)
Real imports
Chart 8: Real Exports and Imports
s.a., CY 2020=100
CY
Sources: Bank of Japan; Ministry of Finance.
Note: Based on staff calculations. Other goods include gold and re-export goods.
70
80
90
100
110
120
130
21 22 23 24 25 26
United States <18.5>
EU <9.1>
China <17.0>
Chart 9: Real Exports by Region
s.a., 2021/Q1=100
CY
Sources: Bank of Japan; Ministry of Finance.
Note: Based on staff calculations. Figures in angular brackets show the share of each
country or region in Japan's total exports in 2025.
70
80
90
100
110
120
130
21 22 23 24 25 26
NIEs, ASEAN, etc.
<37.2>
Other economies
<18.1>
s.a., 2021/Q1=100
22
have recently been pushed down by a decline in
exports of mineral fuels (e.g., gas oil and jet fuel
oil), they have been resilient as a trend, supported
by solid exports of capital goods (semiconductor
production equipment) on the back of global
AI-related demand. Exports to other economies
decreased in the April-June quarter, mainly due to
the significant decline in exports of automobiles to
the Middle East, although the extent of the overall
decline was o nly small. In this regard, looking at
monthly developments in exports to the Middle
East, exports declined significantly through April,
especially of automobile-related goods; since May,
however, they have turned to a pick-up, reflecting
progress in securing alternative export routes. By
type of goods, exports of automobile -related
goods -- despite downward effects from the
situation in the Middle East -- have increased,
particularly those to the United States and Europe,
reflecting factors such as the resu mption of
production lines at some automakers and the
effects of the introduction of new car models
(Chart 10). Exports of capital goods have
increased, particularly of semiconductor
production equipment and equipment for power
facilities, reflecting the s olid increase in global
AI-related demand . Exports of IT -related goods
have been resilient, supported by solid AI -related
demand, such as for data servers. Meanwhile,
exports of intermediate goods had been more or
less flat at low levels, due to continued oversupply,
particularly in Asia, against the background of
excess production capacity in China; more
recently, exports of intermediate goods have
declined further to a lower level due to a decline in
the capacity utilization rate in the basic materials
industry reflecting the impact of the situation in
the Middle East.
70
80
90
100
110
120
130
21 22 23 24 25 26
Intermediate
goods <19.2>
Motor vehicles
and related goods
<22.6>
Sources: Bank of Japan; Ministry of Finance.
Note: Based on staff calculations. Figures in angular brackets show the share of each
type of goods in Japan's total exports in 2025.
Chart 10: Real Exports by Type of Goods
s.a., 2021/Q1=100
CY
70
80
90
100
110
120
130
21 22 23 24 25 26
IT-related goods
<19.2>
Capital goods
<16.6>
s.a., 2021/Q1=100
23
As for the outlook, exports are likely to remain
more or less flat for the time being. This is
because, while solid global AI -related demand is
expected to push up exports of IT -related goods
and capital goods in particular, the impact of the
situation in the Middle East is expected to push
down exports of intermediate goods and other
items. Thereafter, as the impact of the situation in
the Middle East eases, exports are projected to
follow a moderate increasing trend, mainly led by
AI-related capital goods and IT-related goods.
Imports have declined recently, mainly due to the
decline in imports of raw materials reflecting the
impact of the situation in the Middle East (Chart 8).
As for the outlook, for the time being, imports are
expected to pick up owing to progress in securing
alternative sources of supply, despite the impact
of the situation in the Middle East. Thereafter,
imports are likely to follow a moderate uptrend,
supported by a n increase in domestic demand,
including inventory restocking pressure, in
addition to the normalization of logistics reflecting
the easing of tension over the situation in the
Middle East.
External Balance
The nominal current account surplus has
increased recently (Chart 11). The trade balance
has registered a slight surplus, as nominal export
values have increased due to a rise in the export
price per unit for memory chips and other items
and, more recently, the volume of imports of raw
materials has declined, reflecting the situation in
the Middle East. Looking at the services balance,
while the travel balance -- supported by inbound
tourism demand (Chart 12) -- has marked a
-40
-30
-20
-10
0
10
20
30
40
50
16 17 18 19 20 21 22 23 24 25 26
Trade balance
Services balance
Primary income balance
Secondary income balance
Current account balance
s.a., ann., tril. yen
Chart 11: Current Account
Source: Ministry of Finance and Bank of Japan.
Note: Figures for 2026/Q2 are April-May averages.
CY
0
5
10
15
20
25
30
35
40
45
50
16 17 18 19 20 21 22 23 24 25 26
Europe, the United States, and other regions
ASEAN
NIEs
China
Source: Japan National Tourism Organization (JNTO).
Note: Figures for Europe, the United States, and other regions include seasonal
adjustment errors.
Chart 12: Number of Inbound Visitors
s.a., ann., mil. persons
CY
24
surplus, it has remained on a s light deficit trend
on the whole, as payments for digital -related
services have been at high levels. Meanwhile, the
primary income balance surplus has remained on
an expanding trend, pushed up by the
depreciation of the yen, as well as by higher
receipts of, for example, direct investment income
and portfolio investment income.
With regard to the outlook for the nominal current
account balance, in the near term, the surplus is
likely to decline temporarily, as the trade balance
is expected to deteriorate against the backdrop of
factors such as the rise in crude oil prices.
Thereafter, however, the nominal current account
surplus is likely to increase moderately again,
reflecting that the trade balance is expected to
recover due to a decline in crude oil pri ces, and
that the primary income balance surplus is
expected to expand due to an improvement in
overseas economies.
Meanwhile, in terms of the savings -investment
balance, which by definition equals the current
account balance, overall excess savings in Japan
have been on a moderate expanding trend, as the
expansion in excess savings in the corporate
sector reflecting the increase in corporate profits
has outpaced the expansion in the general
government deficit (Chart 13). Looking ahead,
overall excess savings are expected to continue
expanding moderately, against the background of
an improvement in corporate profits and a
decrease in the fiscal deficit in the government
sector.
-80
-60
-40
-20
0
20
40
60
80
16 17 18 19 20 21 22 23 24 25 26
Household sector
Corporate sector
General government
Domestic savings-investment balance
Source: Bank of Japan.
Chart 13: Savings-Investment Balance
4-quarter backward moving avg., ann., tril. yen
CY
Excess savings
Excess investment
25
Industrial Production
Industrial production has continued to be more or
less flat from a somewhat long -term perspective
(Chart 14). By major industry, production of
"transport equipment" -- despite the impact of the
decline in exports to the Middle East -- has been
at a high level, amid resilience in demand from
the Uni ted States and Europe as well as in
domestic demand. Production of
"general-purpose, production, and
business-oriented machinery" -- despite being
affected by fluctuations stemming from production
of semiconductor production equipment and other
items -- has been on an increasing trend, with the
solid increase in global AI -related demand
spreading to the production of a wider variety of
items. Production of "electronic parts and
devices" has been on an increasing trend, mainly
led by production of memory chi ps and electric
circuits, on the back of solid AI -related demand.
Production of "electrical machinery, and
information and communication electronics
equipment" has increased, mainly for
semiconductor measuring instruments and air
conditioners. On the other hand, production of
"chemicals (excluding medicine)" has declined
further, as it has been pushed down by oversupply,
particularly in Asia, as a trend, and more recently
by the impact of the decline in plant utilization
rates reflecting disruptions in impo rts of raw
materials from the Middle East. Meanwhile,
inventories have seen a clear decline recently,
since AI -related demand has been more solid
than firms had expected. The decline also reflects
inventory drawdowns for chemical products
stemming from the situation in the Middle East
and the front -loading of demand for air
conditioners in view of changes in environmental
standards.
90
95
100
105
110
115
120
11 13 15 17 19 21 23 25
Production
Inventories
Source: Ministry of Economy, Trade and Industry.
Note: Shaded areas denote recession periods.
Chart 14: Industrial Production
s.a., CY 2020=100
CY
26
As for the outlook, industrial production is
expected to remain more or less flat for the time
being, with upward effects from the solid increase
in global AI -related demand and downward
effects from the situation in the Middle East
offsetting each other. Thereafter, however,
industrial production is expected to increase
moderately, as the impact of the situation in t he
Middle East eases.
Corporate Profits
Corporate profits have been at high levels against
the backdrop of factors such as the solid increase
in global AI -related demand . According to the
Financial Statements Statistics of Corporations by
Industry, Quart erly, operating profits for all
industries and enterprises have increased further
to a higher level, marking a record high in the
January-March quarter, supported by resilience in
domestic demand and progress in the
pass-through of cost increases to sellin g prices
under such conditions, in addition to the solid
increase in global AI -related demand (Chart 15).
By industry, operating profits of manufacturers
have increased markedly, mainly in electrical
machinery, and information and communication
electronics equipment, as well as in
general-purpose, production, and
business-oriented machinery. This is because the
solid increase in AI -related demand has pushed
up profits through its impact on both prices and
quantities, although in transportation machinery
adverse effects from the deterioration in export
profitability due to the increase in U.S. tariffs have
been observed. As for nonmanufacturers,
operating profits have been at high levels, mainly
in the construction and real estate-related sectors,
against the backdrop of resilient domestic
0
2
4
6
8
10
12
14
16
11 13 15 17 19 21 23 25
Manufacturing
Nonmanufacturing
Source: Ministry of Finance.
Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry,
Quarterly. Excluding "finance and insurance" and "pure holding companies."
2. Shaded areas denote recession periods.
s.a., tril. yen
CY
2. Operating Profits by Industry
0
5
10
15
20
25
30
35
280
300
320
340
360
380
400
420
11 13 15 17 19 21 23 25
Sales (left scale)
Operating profits (right scale)
Current profits (right scale)
Chart 15: Indicators Related to Corporate
Profits
s.a., tril. yen
CY
1. Sales and Profits
s.a., tril. yen
27
demand and progress in the pass-through of cost
increases to selling prices.
Business sentiment has been at a favorable level
against the backdrop of factors such as solid
global AI -related demand, while it has been
affected by the situation in the Middle East.
Looking at the June Tankan, the business
conditions DI for all industries and enterprises
was unchanged from the March Tankan at a net
"favorable" value of 18, remaining at its highest
level since August 1991. As for the outlook,
however, business conditions are projected to
deteriorate by a relatively large degree, with the
forecast DI registering a value of 11, reflecting
concern over an increase in input costs due to the
impact of the situation in the Middle East and over
a reactionary decline following the front-loading of
demand (Chart 16). By industry, the business
conditions DI for manufacturing as a whole has
improved. Th is is because, although adverse
effects of the rise in raw material and energy
prices reflecting the situation in the Middle East
have been seen in the DI for basic materials, the
solid increase in AI -related demand has pushed
up the DI s for the electronic s and capital goods
sectors in particular. The forecast DIs for a wide
range of manufacturing industries indicate that
business conditions are expected to deteriorate,
reflecting the effects of the rise in energy and raw
material prices and expectations of a reactionary
decline following the front-loading of demand. The
business conditions DI for nonmanufacturing has
been at a high level, supported by resilient
domestic demand and progress in the
pass-through of cost increases to selling prices,
although the effects of the rise in raw material and
energy prices and of the difficulty in securing
-60
-40
-20
0
20
40
60
90 95 00 05 10 15 20 25
All industries
Manufacturing
Nonmanufacturing
Source: Bank of Japan.
Notes: 1. Based on the Tankan. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
2. Shaded areas denote recession periods.
Chart 16: Business Conditions
DI ("favorable" - "unfavorable"), % points
"Favorable"
"Unfavorable"
CY
-60
-40
-20
0
20
40
60
% points
Firms'
fore-
cast
Mar. Sept.
26
28
sources of supply for raw materials have pushed
down the DI for small enterprises in particular.
The forecast DI indicates business conditions are
expected to deteri orate reflecting concern over
the increase in input costs.
Regarding the outlook, although the rise in energy
and raw material prices is expected to exert
downward pressure on a wide range of industries
for the time being, corporate profits are likely to
remain on an uptrend, underpinned by the
government's measures to reduce the household
burden of higher energy prices, and pushed up by
solid global AI-related demand.
Business Fixed Investment
Business fixed investment has been on a
moderate increasing trend (Chart 17). The
aggregate supply of capital goods -- a coincident
indicator of machinery investment -- has been on
a moderate increasing trend, albeit with
fluctuations in investment in semi conductor
production equipment and other goods, as the
aggregate supply of capital goods has been
supported by solid demand for AI - and labor
saving-related investments. Despite being
affected by delays in construction projects due to
high construction mat erial prices and labor
shortages, private construction completed
(nonresidential, real) -- a coincident indicator of
construction investment -- has continued on a
moderate uptrend, supported by strong
construction demand, mainly demand for logistics
facilities, demand related to urban redevelopment,
and demand related to electricity.
60
70
80
90
100
110
120
130
70
75
80
85
90
95
100
105
110
11 13 15 17 19 21 23 25
Private nonresidential investment
(SNA, real, left scale)
Domestic shipments and imports
of capital goods (right scale)
Private construction completed
(nonresidential, real, right scale)
Chart 17: Coincident Indicators of
Business Fixed Investment
s.a., ann., tril. yen s.a., CY 2020=100
CY
Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land,
Infrastructure, Transport and Tourism.
Notes: 1. The figure for private construction completed for 2026/Q2 is the April-May
average.
2. Figures for real private construction completed are based on staff calculations
using the construction cost deflators.
29
Machinery orders (private sector, excluding
orders for ships and orders from electric power
companies) -- a leading indicator of machinery
investment -- have increased significantly, due in
part to the effects of large -scale projects (Chart
18). Developments in machinery orders by
industry are as follows. In manufacturing, orders
have increased firmly, supported by large -scale
investments by the chemical, nonferrous metal,
and shipbuilding industries in addition to solid
demand for investment in growth areas, such as
semiconductor components and AI-related areas,
for capacity expansion. Orders from the
nonmanufacturing industry have increased
markedly, mainly in industries such as information
services and finance and insurance, supported by
strong demand for digital - and labor
saving-related investments. Meanwhile, o rders
from electric power companies have increased
significantly, pushed up as a trend by increased
electricity de mand related to data centers and
orders to address decarbonization, and more
recently boosted by large -scale projects.
Construction starts (in terms of planned expenses
for private and nonresidential construction) -- a
leading indicator of construction inv estment --
have been on an increasing trend, mainly in
nonmanufacturing, albeit with fluctuations
stemming from large -scale projects, as
construction starts have been supported by solid
demand related to urban redevelopment and
demand for construction such as of new logistics
facilities and new data centers. Looking at
business fixed investment plans (in nominal
terms) in the June Tankan, business fixed
investment (on a basis close to the GDP
definition; business fixed investment -- including
software and R&D investments but excluding land
purchasing expenses -- for all industries and
5
6
7
8
9
10
11
12
13
14
15
11 13 15 17 19 21 23 25
Machinery orders (private sector, excluding
volatile orders)
Construction starts (private, nonresidential,
estimated construction costs)
Chart 18: Leading Indicators of Business
Fixed Investment
s.a., ann., tril. yen
CY
Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Notes: 1. Volatile orders are orders for ships and orders from electric power companies.
2. Figures for 2026/Q2 are April-May averages.
30
enterprises including financial institutions) for
fiscal 2025 increased firmly at a year-on-year rate
of 8.6 percent, which represents a rate somewhat
higher than that recorde d in the previous fiscal
year (Chart 19). Although investment plans by
small enterprises show some weakness due to
factors such as the impact of the situation in the
Middle East, the year -on-year rate of increase in
business fixed investment plans for fisc al 2026
reported in the Tankan registers 8.9 percent,
which represents an overall solid increase.
Regarding the outlook, business fixed investment
is likely to follow an upward trend, underpinned by
factors such as moves to clear order backlogs for
existing investment projects, in addition to
investment in AI -related areas for capacity
expansion. That said, for the time bein g, the
growth momentum in business fixed investment is
likely to remain subdued due to the impact of a
slower pace of growth in corporate profits
reflecting higher energy and raw material prices, a
rise in construction costs, and delays in
construction projects. Thereafter, with the growth
momentum in corporate profits increasing on the
back of a rise in domestic and external demand
and a decline in input costs, business fixed
investment is likely to follow a moderate uptrend,
supported in part by the effects of the
government's earlier economic measures.
Medium- to long-term investment that is expected
to support business fixed investment during the
projection period includes (1) labor-saving
investment to address structural labor shortages
and IT -related investment to digitalize business
activities; (2) construction investment in logistics
facilities, res ulting from expanding e -commerce,
and in offices and commercial facilities related to
-18
-15
-12
-9
-6
-3
0
3
6
9
12
15
18
11 13 15 17 19 21 23 25
Private nonresidential
investment (SNA, nominal)
Tankan (actual)
Tankan (planned investment in current fiscal year
as of the June survey of each year)
Sources: Bank of Japan; Cabinet Office.
Note: The Tankan figures include software and R&D investments and exclude land
purchasing expenses. R&D investment is not included before the March 2017
survey. The figures are for all industries including financial institutions.
Chart 19: Planned and Actual Business
Fixed Investment
FY
y/y % chg.
31
urban redevelopment; (3) investment in growth
areas, such as AI - and semiconductor -related
areas, for capacity expansion; (4) R&D
investment related to decarbonization a nd to
science and technology support; and (5)
investment mainly aimed at strengthening supply
chains.
Firms' expected growth rate derived from the
pace of increase in capital stock has been at
around 0.5 percent, a level generally consistent
with the potential growth rate (Chart 20). Although
capital stock is likely to accumulate reflecting the
uptrend in business fixed investment, the pace of
increase in such stock is expected to be moderate,
due in part to an increase in the weight of
intangible fixed a sset investment, which has a
high depreciation rate.
Employment and Income Situation
The employment and income situation has
improved moderately.
The rate of increase in the number of employed
persons has accelerated recently, reflecting a
recovery in the growth momentum in the number
of employees (Chart 21). Among employees, the
number of regular employees has been on an
increasing trend, driven by the medical,
healthcare, and welfare services industry, which
has faced severe labor shortages, and recently by
the manufacturing industry, which has
experienced solid AI -related demand. Although
the number of non-regular employees declined to
a somewhat lower level as firms shifted toward
regular employment, it has recovered recently,
04
05
08
09
10
12
14
15
18
19
20
22
23
24
FY 2025
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0
Source: Cabinet Office.
Note: Each broken line represents the combination of the rate of change in business fixed
investment and the investment-capital stock ratio at a certain expected growth rate.
Chart 20: Capital Stock Cycles
investment-capital stock ratio at the end of the previous fiscal year, %
business fixed investment, y/y % chg. Investment-
capital stock
ratio at the
end of FY
2025
Expected
growth rate: -2% -1%
0%
0.5%
1%
1.5%
75
80
85
90
95
100
105
110
62
63
64
65
66
67
68
69
11 13 15 17 19 21 23 25
Employed persons
(left scale)
Regular employees
(right scale)
Non-regular employees
(right scale)
Source: Ministry of Internal Affairs and Communications.
Note: Figures for regular employees and non-regular employees prior to 2013 are based
on the "detailed tabulation" in the Labour Force Survey.
Chart 21: Number of Employed Persons
CY
s.a., mil. persons s.a., CY 2019=100
58
59
60
61
62
63
64
65
2
3
4
5
6
7
11 13 15 17 19 21 23 25
Unemployment rate (left scale)
Labor force participation rate
(right scale)
Source: Ministry of Internal Affairs and Communications.
Chart 22: Unemployment Rate and Labor
Force Participation Rate
s.a., %
CY
s.a., %
32
mainly in the medical, healthcare, and welfare
services industry and in the face-to-face services
industry.
Labor market conditions have remained tight. The
unemployment rate has been at a low level of
around 2.5-3.0 percent (Charts 22 and 232). The
estimate of the employment rate gap -- which is
calculated as the gap between the actual
unemployment rate and t he structural
unemployment rate, the latter reflecting factors
such as mismatches in the labor market -- also
suggests that labor market conditions have
remained tight by historical standards (Chart
232). The DI for employment conditions in the
Tankan has shown a significantly large net
"insufficient," at about the same level as in the
early 1990s, indicating firms' continued strong
sense of labor shortage. In this situation, the
accession-separation rate gap -- the gap between
the accession rate and the separation rate at
establishments -- has remained at a high level,
suggesting strong labor demand on the part of
firms (Chart 233). On the other hand, the
Beveridge ratio has declined slightly compared
with a while ago, due to minimum wage increases
and a decline in the job vacancy rate reflecting
progress in labor -saving investment, although it
has recently picked up somewhat (Chart 231).
Meanwhile, the labor force participation rate has
remained -- albeit with fluctuations -- on a
moderate uptrend, pa rticularly for women (Chart
22).
With regard to the outlook for the employment
situation, the number of employees is expected to
continue increasing moderately, mainly for regular
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
85 90 95 00 05 10 15 20 25
Sources: Bank of Japan; Ministry of Internal Affairs and Communications; Ministry of Health,
Labour and Welfare.
Notes: 1. Beveridge ratio = Vacancy rate / Unemployment rate excluding self-employed and
family workers. Figures are calculated using vacancy rates calculated based on the
Employment Referral Statistics until 2019/Q4, and using the Survey on Labour
Economy Trend from 2020/Q1 onward. Figures from 2025/Q3 onward are
estimates based on the DI for enterprises' employment conditions in the survey.
2. Figures for the Tankan employment conditions DI are for all industries and
enterprises. There is a discontinuity in the data for December 2003 due to a
change in the survey framework.
3. Figures for the accession-separation rate gap (for 1989 and earlier, establishments
with 30 or more employees) are 3-quarter central moving averages (the figure for
2026/Q2 is the April-May average).
4. Shaded areas denote recession periods.
CY
s.a., accession rate - separation rate, % points
3. Accession-Separation Rate Gap
Tighter labor
market
-50
-40
-30
-20
-10
0
10
20
30
40
500.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
85 90 95 00 05 10 15 20 25
Beveridge ratio (left scale)
Tankan employment conditions DI
(right scale)
CY
s.a., ratio
Tighter labor
market
1. Beveridge Ratio and Tankan Employment
Conditions DI
Chart 23: Labor Market Indicators
inverted, DI ("excessive" - "insufficient"), % points
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.01.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
85 90 95 00 05 10 15 20 25
Unemployment rate (left scale)
Employment rate gap (right scale)
inverted, s.a., %
CY
%
2. Unemployment Rate and Employment Rate Gap
Tighter labor
market
33
employees in industries with a strong sense of
labor shortage, despite downward effects from the
situation in the Middle East. However, with labor
force participation of women and seniors having
advanced to a high degree thus far, the pace of
increase is highly likely to decelerate, because
the room for additional growth in labo r supply is
likely to diminish from a demographic perspective.
Under these circumstances, the unemployment
rate -- despite the impact of the situation in the
Middle East -- is expected to follow a very
moderate declining trend.
On the wage side, nominal wages per employee
have continued to increase steadily, albeit with
fluctuations (Chart 24). 10 Looking at the
breakdown, the year -on-year rate of increase in
scheduled cash earnings has been close to 3
percent recently (Chart 25). Specifically, the
year-on-year rate of increase in scheduled cash
earnings per employee for full -time employees
decelerated through last year, reflecting weak
developments particularly in the wholesale and
retail trade industries, which may be due to
sample bias; however, the rate of increase in
these earnings has been at around 2.5 -3.0
percent since the turn of this year, as the effects
of sample bias have dissipated. Looking at hourly
scheduled cash earnings for full -time employees,
the rate of increase has been somewhat above
that of scheduled cash earnings per employee
when fluctuations are smoothed out. The
year-on-year rate of increase in hourly scheduled
cash earnings for part -time employees has
10 Wages in the Monthly Labour Survey are assessed on the basis
of continuing observations, which are less susceptible to
fluctuations due to sample revisions. Nonetheless, the effects of
such revisions can still be observed to a certain degree among
establishments with fewer than 500 employees.
-2
-1
0
1
2
3
4
5
16/Q1 18/Q1 20/Q1 22/Q1 24/Q1 26/Q1
Special cash earnings (bonuses, etc.)
Non-scheduled cash earnings
Scheduled cash earnings
Total cash earnings
Chart 24: Nominal Wages
y/y % chg.
Source: Ministry of Health, Labour and Welfare.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
2. Figures are based on continuing observations following the sample revisions.
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
16/Q1 18/Q1 20/Q1 22/Q1 24/Q1 26/Q1
Scheduled cash earnings
(full-time employees)
Hourly scheduled cash earnings
(full-time employees)
Hourly scheduled cash earnings
(part-time employees)
Chart 25: Scheduled Cash Earnings
y/y % chg.
Source: Ministry of Health, Labour and Welfare.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
2. Figures are based on continuing observations following the sample revisions.
3. Figures for hourly scheduled cash earnings (full-time employees) are
seasonally adjusted.
34
remained at a relatively high level, at around 4 -5
percent, on the back of wage revisions for existing
part-time employees reflecting minimum wage
increases. On the other hand, the year -on-year
rate of increase in the average hourly wage for
temporary and part -time jobs at the time of
recruitment has recently been lower than that in
hourly wages of part -time employees, partly due
to firms becoming cautious about posting new
vacancies. The year -on-year rate of change in
non-scheduled cash earnings has registered a
relatively large positive figure, primarily due to an
increase in hourly w ages for overtime work and,
more recently, to the impact of a rise in overtime
hours associated with increased production in
manufacturing. Meanwhile, looking at the
year-on-year rate of increase in special cash
earnings (bonuses, etc.), such earnings have
maintained their firm growth, albeit with
fluctuations, supported by the high levels of
corporate profits.
With regard to the outlook for wages, a wage
growth rate (in terms of the rate of base pay
increases) of around 3.5 percent -- around the
same level as in 2025 -- was achieved in this
year's annual spring labor -management wage
negotiations. Against this ba ckdrop, the rate of
increase in scheduled cash earnings per
employee for this fiscal year is highly likely to be
around the same level as in fiscal 2025, when the
effects of fluctuations due to sample revisions are
excluded. Regarding the next fiscal year, the rate
of increase in scheduled cash earnings is highly
likely to decelerate somewhat, weighed down by
slower growth in corporate profits due to high
energy and raw material prices. Thereafter,
however, the rate of increase in scheduled cash
35
earnings i s likely to accelerate again, supported
by tighter labor market conditions and an
improvement in corporate profits. Meanwhile, the
rate of increase in special cash earnings
(bonuses, etc.) is expected to decelerate
temporarily from the second half of this fiscal year
through the first half of the next fiscal year,
reflecting changes in corporate profits with a time
lag; however, the growth momentum in special
cash earnings is likely to increase again through
the second half of the projection period.
In lig ht of the aforementioned employment and
wage conditions, nominal employee income has
continued to increase steadily at a pace of around
3-4 percent on a year -on-year basis (Chart 26).
The year -on-year rate of change in employee
income in real terms -- based on the CPI (all items
less imputed rent) -- had been at around 0
percent but has picked up to around 1 -2 percent
since the end of last year, reflecting factors such
as a decline in the inflation rate. With regard to
the outlook, nominal employee income i s likely to
continue increasing steadily, albeit with
fluctuations, with corporate profits remaining on
an uptrend. In real terms, the rate of increase in
employee income is expected to slow noticeably
for a time, reflecting a rise in the inflation rate;
however, it is expected to accelerate again toward
the end of the projection period, as the pace of
price rises moderates.
Household Spending
Private consumption has been resilient against
the background of the improvement in the
employment and income situation, although
weakness has been seen in household sentiment.
-4
-2
0
2
4
6
8
16/Q1 18/Q1 20/Q1 22/Q1 24/Q1 26/Q1
Total cash earnings
Number of employees
Nominal employee income
Real employee income (CPI less imputed rent)
Real employee income (CPI all items)
Chart 26: Employee Income
y/y % chg.
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and
Communications.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
2. Nominal employee income = Total cash earnings (Monthly Labour Survey) ×
Number of employees (Labour Force Survey)
3. Figures are based on continuing observations following the sample revisions of
the Monthly Labour Survey.
4. Figures for real employee income are based on staff calculations using the
price indicators shown in parentheses.
36
The Consumption Activity Index (CAI; real, travel
balance-adjusted) -- which is calculated by
combining various sales and supply-side statistics
-- has increased recently, due to a temporary
increase in demand for durable goods, in addition
to the improvement in real income and the wealth
effects from higher stock prices (Charts 27 and
28).11 By type, consumption of durable goods
had declined somewhat since the turn of this year,
but has recently increased substantially, mainly
for automobiles (Chart 28). Automobile sales had
been relatively weak since the turn of this year, as
consumers had been holding back on purchases
in anticipation of the abolition of the
environmental performance levy on automobiles
at the end of March; since April, however,
automobile sales have increased substantially,
due to pent -up demand. Sales of household
electrical appliances have been at high levels,
albeit with fluctuations. This is because sales of
air conditioners have been solid on the back of an
expansion in subsidies provided by some local
governments for their purchase and the
front-loading of demand in view of the changes in
environmental standards scheduled for next year,
although renewal demand for personal computers
reflecting the end of support for some operating
systems has come to a halt. Consumption of
non-durable goods (e.g., "beverages and food"
and "clothes") had continued on a decreasing
trend against the backdrop of consumers'
thriftiness but has recently picked up, due to the
stockpiling of daily necessities, in addition to the
improvement in real income.
11 Regarding the CAI , see the following paper: "Revision of the
Consumption Activity Index Following the 2020 Base Revision of
GDP Statistics," Bank of Japan Research Paper (June 2026).
-2
0
2
4
6
8
10
22 23 24 25 26
Services <47.1>
Non-durable goods <44.3>
Durable goods <8.6>
CAI
CAI (travel balance adjusted)
Chart 28: Consumption Activity Index
(CAI, Real)
CY
s.a., cumulative chg. from 2022/Q1, %
Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures for the CAI (travel balance adjusted)
exclude inbound tourism consumption and include outbound tourism
consumption. Figures for 2026/Q2 are April-May averages.
2. Non-durable goods include goods classified as semi-durable goods in the SNA.
3. Figures in angular brackets show the weights in the CAI.
75
80
85
90
95
100
105
110
115
120
16 17 18 19 20 21 22 23 24 25 26
Consumption of households (real)
Disposable income, etc. (real)
Consumption of households (nominal)
Disposable income, etc. (nominal)
Chart 27: Consumption of Households and
Disposable Income
s.a., CY 2016-2018 avg.=100
CY
Source: Cabinet Office.
Notes: 1. Figures for consumption of households exclude imputed rent.
2. "Disposable income, etc." consists of disposable income and adjustment for the
change in pension entitlements. Real values are based on staff calculations
using the deflator of consumption of households.
37
Services consumption has increased moderately
(Charts 28 and 29). With the shift to dining -out
continuing as a trend, dining -out has increased
moderately, supported in part by the improvement
in real income. Domestic travel has been at a
relatively high level, supported by a strong
willingness to travel among working households
who have benefitted from wage increases.
Overseas trave l has continued to be somewhat
weak, mainly reflecting relatively high travel costs
due to factors such as the depreciation of the yen.
Looking at confidence indicators related to private
consumption, the Consumer Confidence Index in
the Consumer Confidence Survey -- which asks
consumers for their views on the outlook for the
coming six months -- deteriorated sharply in
March and April, re flecting the unstable situation
in the Middle East and a rise in inflation
expectations; however, the deterioration in the
index has come to a halt since then (Chart 30).
The current economic conditions DI (household
activity-related) of the Economy Watchers Survey
-- which asks firms for their views on the direction
of the economy -- had also declined sharply
through April reflecting concern over a
deterioration in corporate profits due to the rise in
energy prices reflecting the situation in the Middle
East and its adverse impact on private
consumption. However, the DI has generally
stopped declining since then, due in part to strong
sales of durable consumer goods and the wealth
effects from higher stock prices.
Looking at recent developments in private
consumption from various sources, such as
high-frequency indicators, statistics published by
40
50
60
70
80
90
100
110
120
130
140
21 22 23 24 25 26
Total
Retail
Services
Source: Nowcast Inc./ JCB, Co., Ltd., "JCB Consumption NOW."
Notes: 1. Figures are from the reference series in JCB Consumption NOW, which take
changes in the number of consumers into account.
2. Figures exclude telecommunications and energy (fuel, electricity, gas, heat
supply, and water). Based on staff calculations.
Chart 29: Consumption Developments
Based on Credit Card Spending
avg. for the corresponding half of the month inFY 2016-2018=100
CY
0
10
20
30
40
50
60
16 17 18 19 20 21 22 23 24 25 26
Consumer Confidence Index
Economy Watchers Survey (household activity)
Chart 30: Confidence Indicators Related to
Private Consumption
s.a.
Source: Cabinet Office.
Note: Figures for the Economy Watchers Survey are those for the current economic
conditions DI.
CY
Worsened
Improved
38
industry organizations, and anecdotal information
from firms, the growth momentum in private
consumption appears to have been maintained as
a trend, although consumption was pushed down
by weather conditions, such as typhoons and
heavy rains, in June (Chart 29).
Regarding the outlook, while price rises are
expected to weigh on real disposable income,
private consumption for the time being is highly
likely to be re silient, pushed up by the
government's various support measures and the
front-loading of demand for goods such as air
conditioners, in addition to the wealth effects from
higher stock prices. Thereafter, private
consumption is likely to be more or less fla t for a
time, pushed down by a decline in real purchasing
power due to price rises and the waning of the
effects of the government's support measures,
and reflecting the impact of the reactionary
decline following the front -loading of demand for
goods such as air conditioners; however , private
consumption is projected to turn to a moderate
increasing trend, supported by a recovery in real
disposable income reflecting a decline in the
inflation rate.
Housing investment has been on a declining trend
(Chart 31). When fluctuations stemming from the
enforcement of revisions to the Building
Standards Act and other regulations are
smoothed out, the number of housing starts -- a
leading indicator of housing investment -- has
followed a declining trend, mainly reflecting a rise
in housing prices and demographic developments.
Housing investment is likely to follow a moderate
declining trend.
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
18
20
22
24
26
28
11 13 15 17 19 21 23 25
Private residential investment
(SNA, real, left scale)
Housing starts
(right scale)
Chart 31: Housing Investment
s.a., ann., tril. yen
CY
Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2026/Q2 is the April-May average.
s.a., ann., mil. units
39
II. Current Situation of Prices and Their
Outlook
Developments in Prices
The year-on-year rate of increase in the producer
price index (PPI) ha s accelerated markedly,
pushed up by a significant increase in prices of
petroleum and coal products and of chemicals
and related products reflecting the impact of the
situation in the Middle East, as well as by the rise
in pri ces of nonferrous metals and machinery
driven by the expansion in global AI -related
demand (Charts 32 and 33). 12 With moves to
pass on the rise in personnel expenses and other
factors to selling prices continuing, the
year-on-year rate of increase in the services
producer price index (SPPI, excluding
international transportation) has been at around 3
percent (Charts 32 and 39).
The year-on-year rate of increase in the CPI (all
items less fresh food and energy) has been in the
range of 1.5 -2.0 percent recently, mainly due to
the decline in the rate of increase in food prices ,
which had risen substantially last year, although
moves to pass on increases in wages, distribution
costs, and other costs to selling prices have
continued (Charts 32 and 34).13 The year-on-year
rate of increase in the CPI (all items less fresh
food) has recently been at around 1.5 percent due
12 See Box 3 for the background to and impact of upward
pressure on prices in business-to-business transactions.
13 In August 2026, the base year for the CPI is scheduled to be
changed from 2020 to 2025, and the annual CPI inflation for
January 2026 onward will be retroactively revised. While factors
such as the revision of model formulas entail uncertainties, the
year-on-year rate of change in the CPI inflation (all items less
fresh food) from January 2026 onward will likely see no substantial
change between the 2020 base and the 2025 base, given factors
such as the recent developments in the Laspeyres chain index
and the new weight released in July.
-5
0
5
10
15
16 17 18 19 20 21 22 23 24 25 26
Other
Electric power, gas and water
Petroleum and coal products, nonferrous metals
Chemicals and plastic products, etc.
Machinery
Beverages and foods, etc.
All commodities
Source: Bank of Japan.
Notes: 1. Figures exclude the effects of the consumption tax rate change.
2. Figures for "beverages and foods, etc." include agriculture, forestry and fishery
products.
Chart 33: PPI
y/y % chg.
CY
-1
0
1
2
3
4
5
6
21 22 23 24 25 26
Goods
General services (less housing rent)
Housing rent (private and imputed rent)
Administered prices
CPI (less fresh food and energy)
Chart 34: CPI (Less Fresh Food and Energy)
y/y % chg.
Source: Ministry of Internal Affairs and Communications.
Notes: 1. Administered prices (less energy) consist of "public services" and "water
charges."
2. The CPI figures are staff estimates and exclude the effects of the consumption
tax rate change and policies concerning the provision of free education
(including the free school lunches starting in April 2026), the reduction in mobile
phone charges in 2021, and travel subsidy programs.
CY
Chart 32: Inflation Indicators
Sources: Ministry of Internal Affairs and Communications; Cabinet Office; Bank of Japan,
etc.
Notes: 1. CPI figures "less food and energy" include alcoholic beverages. Institutional
factors = the effects of policies concerning the provision of free education
(including the free school lunches starting in April 2026) + measures to reduce
the energy cost burden (such as gasoline prices, electricity and gas charges).
Figures are staff estimates.
2. Figures for the services producer price index (SPPI) exclude international
transportation.
y/y % chg.
25/Q3 25/Q4 26/Q1 26/Q2
Less fresh food 2.9 2.8 1.8 1.5
Excluding institutional factors 2.9 2.7 2.3 2.8
Less fresh food and energy 3.2 3.0 2.5 1.8
Excluding institutional factors 3.4 3.2 2.7 2.1
Less food and energy 1.5 1.5 1.4 1.1
Excluding institutional factors 1.8 1.8 1.7 1.4
2.6 2.6 2.5 6.4
2.9 2.7 2.7 2.9
3.5 3.4 3.2
Domestic demand deflator 2.8 2.6 2.4
Consumer Price Index (CPI)
Producer Price Index (PPI)
Services Producer Price Index
GDP Deflator
40
to factors such as the effects of the government's
measures to reduce the household burden of
higher energy prices (Charts 32 and 35).
Meanwhile, looking at the CPI (all items less food
and energy) -- which is not affected by
fluctuations in food and energy prices -- the
year-on-year rate of increase has been in the
range of 1.0-1.5 percent (Charts 32 and 35).
Regarding the breakdown of the CPI (all items
less fresh food and energy), the rate of increase
in goods prices has decelera ted, mainly due to
the decline in the rate of increase in food prices
(Chart 34). With the pass -through of wage
increases to selling prices continuing, the rate of
increase in general services prices had been at
around 2 percent of late; more recently, how ever,
it has declined to the range of 1.0 -1.5 percent,
mainly due to the effects of free tuition for private
high schools. The year-on-year rate of increase in
administered prices (less energy) has been at
around 0 percent recently , due to downward
effects from factors such as the provision of free
school lunches and reductions in nursery school
fees by some local governments, whil e the rate
has been pushed up by price hikes by railway
companies and the revision of medical fees.
From the perspective of cap turing the underlying
trend in the CPI, looking at core indicators that
exclude institutional factors -- such as the
government's measures to reduce the household
burden of higher energy prices and the provision
of free education -- the year -on-year rate o f
increase in the CPI (all items less fresh food,
excluding institutional factors) has decelerated
compared with a while ago, mainly due to the
-2
-1
0
1
2
3
4
5
6
21 22 23 24 25 26
Institutional factors Energy
Rice Food (less rice)
Less food and energy CPI (less fresh food)
Chart 35: CPI (Less Fresh Food)
y/y % chg.
Sources: Ministry of Internal Affairs and Communications, etc.
Notes: 1. Figures for energy consist of those for petroleum products, electricity, and gas,
manufactured & piped. Figures for food (less rice) exclude fresh food and
alcoholic beverages.
2. Institutional factors = the effects of the consumption tax rate change and
policies concerning the provision of free education (including the free school
lunches starting in April 2026) + measures to reduce the energy cost burden
(such as gasoline prices, electricity and gas charges) + the reduction in mobile
phone charges in 2021 + travel subsidy programs. Figures are staff estimates.
CY
41
deceleration in the rate of increase in food prices;
however, the rate of increase has remained above
2 percent . Similarly, the year -on-year rate of
increase in the CPI (all items less fresh food and
energy, excluding institutional factors) has also
decelerated compared with a while ago, and has
recently been at around 2 percent (Chart 36). 14
The year-on-year rate of increase in the CPI (all
items less food and energy, excluding institutional
factors) has been at around 1.5 percent. Core
indicators calculated using information such as
the price change distribution exhibited the
following developments (Chart 37). 15 The rate of
increase in the trimmed mean of the year-on-year
rate of change in the CPI had decelerated to
around 1.5 percent, mainly due to the
deceleration in the rate of increase in food prices;
more recently, however, the rate of increase has
risen somewhat due to factors such as the impact
of the rise in medical fees. The rate of increase in
the weighted median had declined due to the
deceleration in the rate of increase in food prices
and the effects of the government's measures to
reduce the household burden of higher energy
prices; more recently, however, the rate of
increase has accelerated slightly to around 1
14 Institutional factors refer to the effects of the consumption tax
rate changes and policies concerning the provision of free
education (including the free school lunches starting in April 2026),
measures to reduce the energy cost burden (such as gasoline
prices, electricity and gas charges), the reduction in mobile phone
charges in 2021, and travel subsidy programs. The effects of
institutional factors are staff estimates.
15 The trimmed mean is calculated by excluding items that belong
to a certain percentage of the upper and lower tails of the price
change distribution (10 percent of each tail) in order to eliminate
the effects of large relative price changes. The mode is the
inflation rate with the highest density in the price change
distribution. The weighted median is the average of the inflation
rates of the items at around the 50 percentile point of the
cumulative distribution in terms of weight. Each indicator is
calculated using data for each CPI item that excludes the effects
of the consumption tax changes and policies concerning the
provision of free education, and travel subsidy programs.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
11 13 15 17 19 21 23 25
Trimmed mean
Weighted median
Mode
Chart 37: CPI: Trimmed Mean, etc.
y/y % chg.
Sources: Bank of Japan, etc.
Note: Based on staff calculations using the CPI. The CPI figures are staff estimates and
exclude the effects of the consumption tax rate changes and policies concerning
the provision of free education (including the free school lunches starting in April
2026), and travel subsidy programs.
CY
-1
0
1
2
3
4
5
16 17 18 19 20 21 22 23 24 25 26
Excluding fresh food and
institutional factors
Excluding fresh food, energy,
and institutional factors
Excluding food, energy,
and institutional factors
Chart 36: CPI (Excluding Institutional
Factors)
y/y % chg.
Sources: Bank of Japan, etc.
Note: Institutional factors = the effects of the consumption tax rate change and policies
concerning the provision of free education (including the free school lunches
starting in April 2026) + measures to reduce the energy cost burden (such
as gasoline prices, electricity and gas charges) + the reduction in mobile phone
charges in 2021 + travel subsidy programs. Figures are staff estimates.
CY
42
percent. Similarly, the rate of increase in the mode
had declined since the turn of this year but has
recently accelerated to around 1.5 per cent.
Looking at the year-on-year price changes across
all CPI items (less fresh food), the share of items
whose prices have increased minus the share of
items whose prices have decreased had been on
a declining trend in positive territory but has
recently stop ped decreasing and started picking
up reflecting an increase in the number of items
whose prices have increased, such as food items
(Chart 38). Meanwhile, looking at the relationship
between wages and services prices, with
progress in the pass-through of wage increases to
services prices of a wide range of items, both
wages and services prices have been on a
moderate increasing trend (Chart 39).
Indicators of medium - to long -term inflation
expectations, which represent people's
perceptions of price developments, have
increased moderately toward 2 percent on the
whole (Chart 40).16 Medium- to long-term inflation
expectations of firms have continued to trend
upward and have been above 2 percent. Although
medium- to long -term inflation expectatio ns of
households and experts have remained below 2
percent, they have been rising moderately overall.
The break-even inflation (BEI) rate, derived from
inflation-indexed government bonds, has been at
around 2 percent, albeit with some fluctuations.
Regarding trend inflation estimated from
economic models, all of the models have shown a
moderate uptrend, with estimates hovering in a
16 For details on the concept and measures of underlying inflation,
see the following paper: Monetary Affairs Department, Bank of
Japan, "The Concept and Measurement of Underlying Inflation,"
Bank of Japan Review Series, March 2026.
0
10
20
30
40
50
60
70
80
90
100
-100
-80
-60
-40
-20
0
20
40
60
80
100
11 13 15 17 19 21 23 25
Diffusion index (left scale)
Share of increasing items (right scale)
Share of decreasing items (right scale)
Chart 38: Diffusion Index of Price Changes
% points %
Sources: Bank of Japan, etc.
Note: The diffusion index is defined as the share of increasing items minus the share of
decreasing items. The share of increasing/decreasing items is the share of items
for which price indices increased/decreased from a year earlier. Based on staff
calculations using the CPI (less fresh food). The CPI figures are staff estimates
and exclude the effects of the consumption tax rate changes and policies
concerning the provision of free education (including the free school lunches
starting in April 2026), and travel subsidy programs.
CY
-3
-2
-1
0
1
2
3
4
5
6
7
83 87 91 95 99 03 07 11 15 19 23
CPI for general services
(less housing rent)
SPPI (excluding international
transportation)
Hourly scheduled cash earnings
(regular employees)
Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour and
Welfare; Bank of Japan.
Notes: 1. Figures for the CPI for general services (less housing rent) are staff estimates
and exclude the effects of the consumption tax rate changes and policies
concerning the provision of free education, the reduction in mobile phone
charges in 2021, and travel subsidy programs.
2. Figures for the SPPI (excluding international transportation) are estimated
excluding the effects of the consumption tax rate changes.
3. Figures for hourly scheduled cash earnings (regular employees) are seasonally
adjusted (3-quarter central moving averages). Moreover, figures from 2016/Q1
onward are based on continuing observations following the sample revisions.
4. The figure for hourly scheduled cash earnings (regular employees) for 2026/Q2
is the April-May average.
Chart 39: Wages and Prices
CY
y/y % chg.
43
range from 1.5 to around 2 percent recently
(Chart 41).17
Meanwhile, a decomposition of changes in the
GDP deflator from the distribution side shows that,
while the acceleration in the rate of increase in the
GDP deflator observed in 2023 was mainly led by
unit profits as firms passed on cost increases, the
contribution of unit labor costs has intensified
since 2024, reflecting wage increases. Against
this backdrop, the rate of increase in the GDP
deflator has been in the range of 3.0 -3.5 percent,
with both unit profits and unit labor costs pushing
up the rate in a balanced manner (Chart 42).
Environment Surrounding Prices
In the outlook for prices, the main factors that
determine inflation rates are assessed as follows.
First, the output gap is expected to remain
positive at around its current level throughout the
projection period (Chart 2). Meanwhile, it is likely
that labor market conditions have tightened to a
greater extent than can be explained by the
changes in the output gap, mainly due to a
deceleration in the pace of increase in labor force
participation of women and seniors (Chart 23). In
this situation, upward pr essure on wages and
prices likely has become stronger than suggested
by the output gap, given the current situation that
labor shortages have begun to cause supply-side
constraints, mainly in industries in
nonmanufacturing that are labor-intensive.
17 Trend inflation should be interpreted with some latitude, taking
into account the following points among others: (1) the estimates
are susceptible to being influenced by the most recent data; and
(2) there is the so -called "real -time problem," in which past
estimates are subject to substantial revisions whenever the data
used for the estimation are updated.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
13 16 19 22 25
Market participants (QUICK, 2 to 10 years ahead)
Economists 1 (6 to 10 years ahead)
Economists 2 (7 to 11 years ahead)
Households (over the next 5 years)
Firms (5 years ahead)
Chart 40: Inflation Expectations
y/y, ann. avg., %
1. Survey
Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>";
JCER, "ESP Forecast"; Consensus Economics Inc., "Consensus Forecasts";
Bloomberg.
Notes: 1. "Economists 1" shows the forecasts of economists in the Consensus Forecasts.
"Economists 2" shows the forecasts of forecasters surveyed for the ESP Forecast.
2. Figures for households are from the Opinion Survey on the General Public's
Views and Behavior, estimated using the modified Carlson-Parkin method for a
5-choice question.
3. Figures for firms show the inflation outlook of enterprises for general prices
(all industries and enterprises, average) in the Tankan.
4. The composite indexes of inflation expectations are for 10-year-ahead
expectations. They are staff estimates and are obtained by extracting the
common component, using principal component analysis (PCA), from the inflation
expectations of households, firms, and experts. For details on PCA[i] and PCA[ii],
see "The Concept and Measurement of Underlying Inflation," Bank of Japan
Monetary Affairs Department, March 2026.
CY
0.0
0.5
1.0
1.5
2.0
2.5
3.0
13 16 19 22 25
Composite index of inflation expectations (PCA[i])
Composite index of inflation expectations (PCA[ii])
%
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
13 14 15 16 17 18 19 20 21 22 23 24 25 26
Old (longest)
New (10-year)
Source: Bloomberg.
Note: The BEI (break-even inflation) rate is the yield spread between fixed-rate
coupon-bearing JGBs and inflation-indexed JGBs. Inflation-indexed JGBs
issued since October 2013 are designated as "new," while the rest are
designated as "old." Figures for "old (longest)" are calculated using yield
data for issue No. 16 of inflation-indexed JGBs, which matured in June 2018.
CY
%
2. BEI
44
Second, medium - to long -term inflation
expectations have risen moderately (Chart 40).
Regarding the outlook, as firms' active wage- and
price-setting behavior is expected to continue on
the back of factors such as the tightening of labor
market conditions, inflation expectations are likely
to continue to rise moderately. Medium - to
long-term inflation expectations are expected to
come to a level around 2 percent between the
second half of fiscal 2026 and fiscal 2027 and
remain at around that level thereafter.
Third, the year -on-year rate of increase in the
import price index on a yen basis has increased
clearly, recently reaching a level close to 30
percent, due to a rise in the rate of increase in the
index on a contract currency basis reflecting the
situation in the Middle East and the expansion in
global AI-related demand, as well as to the impact
of the yen's depreciation (Charts 44 and 45). For
the time being, import prices are likely to continue
to see a significant pace of increase at around the
current level. Subsequently, the rate of increase in
the import price index is projected to decelerate
gradually, reflecting a decline in commodity prices,
including crude oil.
Meanwhile, the year -on-year rate of change in
energy prices (e.g., gasoline prices and electricity
charges) has been negative recently due to the
effects of the government's measures to reduce
the household burden of higher energy prices,
such as fuel oil subsidies. Assuming that crude oil
prices and foreign exchange rates will remain at
around the current levels , and given the
government's implementation of emergency
measures to curb dramatic price fluctuations and
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
13 14 15 16 17 18 19 20 21 22 23 24 25 26
Model 1: Phillips curve model (time-varying intercept)
Model 2: Time-varying parameter VAR model
Model 3: Semi-structural model
Model 4: Trend-cycle decomposition model
Chart 41: Trend Inflation
%
CY
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and
Communications; Cabinet Office; Bank of Japan; QUICK, "QUICK Monthly
Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts";
Bloomberg; Google Trends.
Note: Figures are staff estimates.
-3
-2
-1
0
1
2
3
4
5
6
7
11 13 15 17 19 21 23 25
Unit profits, etc.
Unit labor costs
GDP deflator
Source: Cabinet Office.
Note: Unit labor costs = Nominal compensation of employees / Real GDP
Chart 42: GDP Deflator
y/y % chg.
CY
-50
-40
-30
-20
-10
0
10
20
30
40
50
74 78 82 86 90 94 98 02 06 10 14 18 22 26
Manufacturing
Nonmanufacturing
Source: Bank of Japan.
Note: Based on the Tankan. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
DI ("rise" - "fall"), % points
CY
Chart 43: Output Prices
45
its measures to reduce the household burden of
higher electricity and gas charges this summer,
the year-on-year rate of change in energy prices
is likely to be at around 0 percent for the time
being, and then increase markedly through
around the end of this fiscal year, mainly reflecting
rises in electricity and gas charges. Thereafter,
reflecting the decline in crude oil p rices, the
year-on-year rate of change in energy prices is
likely to follow a decelerating trend, albeit with
fluctuations, and turn negative toward the end of
next year.
Outlook for Prices
Based on the aforementioned environment
surrounding prices, the year -on-year rate of
increase in the CPI (all items less fresh food and
energy) is likely to be at around 2 percent in the
near term, pushed down by a decline in the
year-on-year rate of increase in food prices, such
as rice prices, as well as by institutional factors
such as the provision of free education. However,
the rate of increase in this CPI is expected to
accelerate to a level above 3 percent toward the
beginning of the next fiscal year. This is because,
from this summer, (1) moves to pass on the yen's
depreciation since last autumn to prices, (2) the
rise in the prices of semiconductors and other
items reflecting the expansion in AI -related
demand, and (3) the rise in energy and raw
material prices reflecting the situation in the
Middle East are expected to exert greater upward
pressure on the prices of goods, such as food,
durable goods, and daily necessities, and some
services prices. Subsequently, the rate of
increase in this CPI is likely to decline, as firm's
price-setting stance be comes more cautious
reflecting a slowdown in consumption with some
0
20
40
60
80
100
120
140
160
180
200
0
20
40
60
80
100
120
140
11 13 15 17 19 21 23 25
Crude oil (Dubai, left scale)
Copper (left scale)
FAO food price index (right scale)
Chart 44: International Commodity Prices
oil: $/bbl, copper: 100 $/t, monthly avg.
CY
index
Sources: Nikkei Inc.; Bloomberg; FAO.
Note: The FAO food price index is a price index comprising meat, dairy, cereals,
vegetable oils, and sugar (CY 2014-2016 average=100).
-30
-20
-10
0
10
20
30
40
50
16 17 18 19 20 21 22 23 24 25 26
Exchange rates
Commodity prices, etc.
All commodities
Chart 45: Import Prices (Yen Basis)
CY
Source: Bank of Japan.
Note: The contribution of changes in commodity prices, etc. is calculated using changes
in the import price index on a contract currency basis. The contribution of changes
in exchange rates is calculated using the difference between the import price index
on a yen basis and that on a contract currency basis.
y/y % chg.
46
time lag. Toward the end of the projection period,
with a recovery trend in the economy and
tightening of labor market conditions becoming
clear, the rate of increase in this CPI is likely to be
in the range of 2.0-2.5 percent, as moves to pass
on wage increases to selling prices take hold in a
wide range of items in both goods and services
(Chart 46).
The year-on-year rate of increase in the CPI (all
items less fresh food) is likely to be at around 2
percent for the time being, as the rise in energy
prices is likely to be curbed by the government's
fuel oil subsidies and its measures to reduce the
household burden of higher electricity and gas
charges this summer . Toward the second half of
this fiscal year, however, the rate of increase in
this CPI is expected to accelerate markedly, to a
level exceeding 3 percent, due to a greater
upward contribution of energy prices reflecting a
rise in electricity and gas charges driven by higher
import prices of liquefied natural gas (LNG), as
well as a higher rate of increase in the CPI (all
items less fresh food and energy). Thereafter, the
rate of increase in the CPI (all items less fresh
food) is expected to follow a decele rating trend
and be at around 2 percent, when fluctuations are
smoothed out, as the rate of increase in energy
prices declines and its contribution even turns
negative reflecting a decline in crude oil prices.
Firms' behavior has shifted more toward raisi ng
wages and prices, and it is likely that the
mechanism in which both wages and prices rise
moderately will be maintained if the economy
develops as assumed in the baseline scenario.
That said, since changes in foreign exchange
-2
-1
0
1
2
3
4
5
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5
1983/Q1-2013/Q1
2013/Q2-2026/Q1
2026/Q2
All:1983/Q1-2026/Q2
y = 0.54x + 0.9
Chart 46: Phillips Curve
CPI (less fresh food and energy), y/y % chg.
output gap (2-quarter lead, %)
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Notes: 1. The CPI figures are staff estimates and exclude mobile phone charges and the
effects of the consumption tax rate changes and policies concerning the
provision of free education (including the free school lunches starting in April
2026), and travel subsidy programs.
2. Figures for the output gap are staff estimates.
47
rates have exerted a greate r impact on domestic
prices partly reflecting a rise in the import
penetration ratio, if the yen depreciates further, or
if upward pressure on prices strengthens from the
demand side as a result of AI -related demand
rising further than expected, there is a lso a
possibility that the rates of increase in wages and
prices will both deviate upward from the baseline
scenario, accompanied by a rise in medium - to
long-term inflation expectations. On the other
hand, if the downward effects of a deterioration in
trading gains on corporate profits, for example,
become amplified and prolonged, this could lead
firms to focus on cost cutting to a greater extent
than expected; consequently, upward pressure on
wages could weaken, and inflation could decline
from a somewhat long-term perspective.
48
III. Financial Developments in Japan
Financial Conditions
Financial conditions have been accommodative.
Looking at short -term interest rates, the
uncollateralized overnight call rate had been at
around 0.75 percent and has been at around 1.0
percent since the policy interest rate was raised at
the June Monetary Policy Meeting (Chart 47). 18
Regarding interest rates on term instruments,
both the 3 -month TIBOR and the 3 -month
treasury discount bill (T-Bill) rate have risen.
Real interest rates have been negative, mainly in
the short- to medium-term zone (Chart 48).
Firms' funding costs have increased (Chart 49).
As for lending rates (the average interest rates on
new loans and discounts), both long -term and
short-term ones have risen, due to a rise in
market interest rates, which serve as base rates.
Issuance rates for CP have increased, in tandem
with the rise in short-term interest rates. Issuance
rates for corporate bonds have risen, reflecting
the increase in their base rate . Meanwhile,
looking at funding costs on a stock basis, the
average interest expense rate for corporates has
remained sufficiently low relative to firms'
profitability, such as return on assets (ROA)
(Chart 50).
18 See Box 4 for the effects of policy interest rate hikes on
households.
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
10 12 14 16 18 20 22 24 26
Real interest rate
Nominal interest rate
Chart 48: Real Interest Rate (1-Year)
CY
%
Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>";
Consensus Economics Inc., "Consensus Forecasts"; Bloomberg.
Note: Figures for the real interest rate are calculated as government bond yields (1-year)
minus the composite index of inflation expectations (staff estimates).
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
23 24 25 26
TIBOR (3-month)
T-Bill rate (3-month)
Repo rate (overnight)
Uncollateralized overnight call rate
Chart 47: Short-term Interest Rates
%
Sources: Bank of Japan; JBA TIBOR Administration; Bloomberg.
Note: Figures for repo rate are the Tokyo Repo Rate.
CY
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
05 07 09 11 13 15 17 19 21 23 25
Bank lending rate (short-term)
Bank lending rate (long-term)
CP (3-month)
Corporate bonds (AA)
Chart 49: Bank Lending Rates and Issuance
Yields for CP and Corporate Bonds
Sources: Bank of Japan; Japan Securities Depository Center; Capital Eye;
I-N Information Systems; Bloomberg.
Notes: 1. Figures for issuance yields for CP up through September 2009 are the averages
for CP (3-month, rated a-1 or higher). Those from October 2009 onward are the
averages for CP (3-month, rated a-1).
2. Figures for issuance yields for corporate bonds are the averages for domestically
issued bonds launched on a particular date. Bonds issued by banks and securities
companies, etc. are excluded.
3. Figures for bank lending rates are 6-month backward moving averages.
CY
%
49
The DI in the Tankan for financial institutions'
lending attitudes as perceived by firms suggests
that such attitudes have remained
accommodative on the whole (Chart 51). The DI
for issuanc e conditions for CP has continued to
show net "easy" conditions. As suggested by the
latter, issuance conditions for CP and corporate
bonds have been favorable. Meanwhile, the DI for
firms' financial positions in the Tankan suggests
that they have been at favorable levels on the
back of the recovery in economic activity and
progress in the pass-through of cost increases to
selling prices (Chart 52).
-30
-20
-10
0
10
20
30
40
95 00 05 10 15 20 25
Large enterprises
Small enterprises
Source: Bank of Japan.
Note: Based on the Tankan. All industries. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
DI ("accommodative" - "severe"), % points
CY
Chart 51: Lending Attitudes of Financial
Institutions as Perceived by Firms
0
1
2
3
4
5
6
7
8
85 90 95 00 05 10 15 20 25
ROA
Average interest expense rate for
corporates
Average contract interest rate on
loans and discounts (stock, total)
Sources: Ministry of Finance; Bank of Japan.
Notes: 1. ROA is calculated as operating profits divided by total assets. The average
interest expense rate for corporates is calculated as interest payments divided
by interest-bearing debt. Figures for these items are based on the Financial
Statements Statistics of Corporations by Industry, Quarterly. All enterprises.
Figures exclude "finance and insurance" and those for 2009/Q2 onward also
exclude "pure holding companies." Seasonally adjusted.
2. The average contract interest rate on loans and discounts is based on
domestically licensed banks.
Chart 50: Firms' Funding Costs and
Profitability
%
CY
-30
-20
-10
0
10
20
30
40
95 00 05 10 15 20 25
Large enterprises
Small enterprises
Chart 52: Firms' Financial Positions
DI ("easy" - "tight"), % points
CY
Source: Bank of Japan.
Note: Based on the Tankan. All industries. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
50
Firms' demand for funds has increased on the
back of, for example, the recovery in economic
activity as well as mergers and acquisitions of
firms. In this situation, the year -on-year rate of
increase in the amount outstanding of bank
lending has risen to the range of 6.0 -6.5 percent
(Chart 5 3). The year -on-year rate of increase in
the aggregate a mount outstanding of CP and
corporate bonds has been at around 6.5 percent,
pushed up in part by past large-scale issuances.
The year -on-year rate of change in the money
stock (M2) has been in the range of 2.0 -2.5
percent, as an increase in the amount outstanding
of bank lending has continued to push up the rate
(Chart 54).
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
05 07 09 11 13 15 17 19 21 23 25
Lending by domestic
commercial banks
CP and corporate bonds
Chart 53: Amounts Outstanding of Bank
Lending, CP, and Corporate Bonds
Sources: Bank of Japan; Japan Securities Depository Center;
Japan Securities Dealers Association; I-N Information Systems.
Note: Figures for lending by domestic commercial banks are monthly averages.
Figures for CP and corporate bonds are those at the end of the period.
CY
y/y % chg.
-1
0
1
2
3
4
5
6
7
8
9
10
98 00 02 04 06 08 10 12 14 16 18 20 22 24 26
M2
M3
Source: Bank of Japan.
Chart 54: Money Stock
CY
monthly avg., y/y % chg.
51
Developments in Financial Markets
In global financial markets, although the
expansion in global AI -related demand has been
having the effect of improvin g market sentiment,
attention has continued to be drawn to the
uncertainties over the situation in the Middle East.
Yields on 10-year government bonds in the United
States rose through mid -May, as attention was
drawn to heightened inflationary pressure
reflecting the rise in crude oil prices (Chart 55).
Since then, 10 -year yields in the Unites States
declined temporarily , reflecting the decline in
crude oil prices, but have risen again recently ,
mainly due to increased market expectations of
policy interest rate hikes by the Federal Reserve
reflecting solid economic indicators and to the
rebound in crude oil prices. Yields on 10 -year
government bonds in Europe have risen over the
observed period, moving in line with
developments in crude oil prices. In Japan, yields
on 10-year government bonds have risen over the
observed period with attention being drawn to
heightened inflationary pressure, although they
fluctuated somewhat significantly at times
reflecting factors such as market views on
Japan's economic and monetary policies.
Premiums for U.S. dollar funding through the
dollar/yen foreign exchange swap market have
generally been at low levels (Chart 56).
With the expansion in AI -related demand
continuing, stock prices in the United States have
risen over the observed period, although they
declined at times reflecting market attention to the
0
1
2
3
4
5
6
23 24 25 26
Japan
United States
Germany
Source: Bloomberg.
%
CY
Chart 55: 10-Year Government Bond Yields
in Selected Advanced Economies
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
19 20 21 22 23 24 25 26
Yen
Euro
Chart 56: Dollar Funding Premiums through
Foreign Exchange Swaps
Source: Bloomberg.
Notes: 1. U.S. dollar funding premiums are calculated as the difference between U.S.
dollar fundings rates (3-month) in the dollar/yen or euro/dollar foreign exchange
swap market and those in the money market.
2. The interest rates used for the calculation are as follows: for the yen, the OIS
rate; for the euro, the EONIA-referencing OIS rate before October 4, 2019,
and the €STR-referencing OIS rate thereafter; for the U.S. dollar, the OIS rate
before January 3, 2019, and the SOFR thereafter.
CY
%
52
high valuation of high -tech-related stocks (Chart
57). Stock prices in Europe have risen over the
observed period, lik e those in the United States.
Stock prices in Japan have risen on the back of
factors such as favorable business performance,
although they declined at times in line with U.S.
stock prices. Meanwhile, stock prices in emerging
economies have declined recently.
In foreign exchange markets, the yen has
depreciated against the U.S. dollar, reflecting
factors such as increased market expectations of
policy interest rate hikes by the Federal Reserve ,
with the U.S. economy remaining solid (Chart 58).
The euro/ye n exchange rate has been more or
less flat.
120
130
140
150
160
170
180
190
23 24 25 26
U.S. dollar/yen
Euro/yen
Source: Bloomberg.
Chart 58: U.S. Dollar/Yen and Euro/Yen
Yen
depreciation
Yen
appreciation
yen
CY
80
100
120
140
160
180
200
220
240
260
280
300
23 24 25 26
Japan (Nikkei 225 Stock Average)
United States (S&P500)
Europe (EURO STOXX)
Emerging markets (MSCI)
Source: Bloomberg.
Note: Figures for emerging markets are those for the MSCI Emerging Markets Index
(local currency).
Chart 57: Selected Stock Price Indices
CY
start of 2023=100
53
(Box 1) Developments in Raw Materials Imports in Response to
the Situation in the Middle East
As noted in the previous Outlook Report, Japan 's
economy is highly dependent on the Middle East
for mineral fuels, such as crude oil and naphtha.
Given this, increased tension over the situation in
the Middle East has been significantly affecting
Japan's imports of raw materials. 19 This box
examines developments in raw materials imports
following the previous Outlook Report , from the
aspects of both volume and price.
In terms of volume, examining developments in
crude oil imports derived from alternative data
based on vessel tracking information reveals that
imports of Middle Eastern crude oil -- which had
accounted for more than 90 percent of total crude
oil imports prior to the military conflict -- declined
significantly from March through April. However,
from May onward, crude oil imports clearly
rebounded, accompanied by a diversification of
sources of supply, as seen in a marked rise in
imports of U.S. crude oil, i n addition to imports
from the Middle East bypassing the Strait of
Hormuz (Chart B1 -11). Forecast figures for
crude oil imports estimated based on information
such as past vessel movement data suggest that,
for the time being, import volumes will general ly
be maintained at levels seen prior to the military
conflict. Similarly, with respect to naphtha, while
imports from the Middle East -- which had
constituted 70 percent of total naphtha imports --
19 For details, see Box 1 of the April 2026 Outlook Report
(Assumptions for Crude Oil Prices in the Baseline Scenario and
the Impact of Worsening Terms of Trade on Japan's Economy).
0
10
20
30
40
50
60
70
80
90
100
Jan.25 July Jan.26 July
Others
United States
Middle East
Source: Kpler.
Note: As of July 29. The Kpler forecast is based on data such as historical vessel
movement patterns and is subject to revision. For the forecast period, "others"
include countries of origin that are currently unidentified.
Chart B1-1: Import Volumes of Crude Oil
and Naphtha
mil. bbl
Kpler
forecast
1. Crude Oil 2. Naphtha
CY 2025
average
0
2
4
6
8
10
12
14
16
Jan.25 July Jan.26 July
Others
Algeria
United States
Middle East
mil. bbl
Kpler
forecast
54
declined sharply, there has been progress in
securing alternative sources of supply in the form
of an increase in imports of U.S. and Algerian
naphtha since April (Chart B1-12). As described
above, with progress being made in alternative
imports of both crude oil and naphtha from
regions other t han the Middle East, a significant
decline in economic activity owing to large -scale
disruptions in supply chains has been avoided.
In terms of prices, with the de facto closure of the
Strait of Hormuz remaining in effect, the spot price
of Dubai crude oil remained el evated at around
100 U.S. dollars per barrel until May. It then
declined temporarily to pre-military conflict levels,
reflecting the signing in mid-June of the U.S.-Iran
memorandum of understanding aimed at bringing
the conflict in the Middle East to an end; however,
the price has seen an upturn since mid-July, given
the resurgence of tension over the situation in the
Middle East. With respect to the outlook for crude
oil prices in light of these significantly large
fluctuations, the monthly averages for July
through September are assumed to be around 80
U.S. dollars, and to subsequently decline
moderately to around 70 dollars toward the end of
the projection period, in line with the shape of the
futures curve, which reflects the collective views
of market participants (Chart B1 -2). Comparing
this assum ed path of crude oil prices with that
presented in the previous Outlook Report , prices
are lower throughout the projection period.
That said, with Japanese firms placing priority on
securing the volume of mi neral fuels, attention
should be paid to the fact that procurement costs
borne by these firms have been subject to
60
70
80
90
100
110
120
130
140
150
160
170
24 25 26 27 28 29
Futures-curve-based
min-max range
Dubai oil prices
Dubai oil prices (as of
the previous Outlook
$/bbl
CY
Sources: Nikkei Inc.; Bloomberg.
Note: Figures for the assumed path are prepared with reference to the Brent crude oil futures
curves (as of July 21). The "futures-curve-based min-max range" represents the range
between the maximum and minimum values obtained by plotting futures curves
prepared using the same method as that used for the assumed path, for each date
from March 9 to July 21.
Chart B1-2: Assumed Path of Crude Oil
Prices
Assumed path
Increased tension
over the situation in
the Middle East
U.S.-Iran memorandum
of understanding
Report)
55
additional upward pressure. In fact, looking at the
unit import prices of crude oil and naphtha, unit
prices of imports from regions other t han the
Middle East, such as the United States, have
been higher than those of imports from the Middle
East, reflecting the l onger transportation
distances and other factors; moreover, due in part
to an increase in spot procurement, unit prices of
imports from the Middle East have also remained
elevated relative to market prices (Chart B1 -3).
Under these circumstances, unit import prices of
mineral fuels, including crude oil and naphtha,
have recently become relatively high compared to
market prices of Dubai crude oil , which they had
moved in tandem with in the past (Chart B1 -4).
How long the current sourcing activity will
continue is highly uncertain; however, it seems
that a growing number of firms have been
irreversibly diversifying sources of s upply for raw
materials, aiming to enhance resilience against
geopolitical risks. If this is the case, the
procurement costs of mineral fuels that Japanese
firms will have to bear may not fall to levels as
indicated by the market prices of crude oil. It is
considered that t hese additional procurement
costs in the upstream stage of the production
process will be passed on to the downstream,
thereby pushing up the prices of a variety of
goods and services.
20
40
60
80
100
120
140
Jan.26 Mar. May
Overall average
Middle East
United States
Others
Sources: Ministry of Finance; Petroleum Association of Japan (PAJ).
Notes: 1. Figures for naphtha are compiled based on the PAJ definition.
2. In the right-hand chart, figures are linearly interpolated for months with no
import data or with negligible import volumes and large fluctuations in import
prices per unit.
Chart B1-3: Crude Oil and Naphtha Import
Prices per Unit
$/bbl
1. Crude Oil 2. Naphtha
20
40
60
80
100
120
140
Jan.26 Mar. May
Overall average
Middle East
United States
Algeria
Others
$/bbl
50
60
70
80
90
100
110
120
130
22 23 24 25 26
Crude oil prices (Dubai, one-month lead)
Crude oil import prices per unit (Trade Statistics)
Naphtha import prices per unit (Trade Statistics)
Sources: Ministry of Finance; Nikkei Inc.; Bank of Japan; PAJ.
Note: Figures for naphtha are compiled based on the PAJ definition.
Chart B1-4: Import Prices per Unit for
Mineral Fuels
yen/liter
CY
56
(Box 2) Impact of Increased Global AI-Related Demand on Japan's Economy
Global AI -related demand has continued to
expand robustly, mainly due to strong investment
in data centers by U.S. hyperscale rs, and has
recently been on a clear uptrend, accompanied by
the widening scope of AI usage. In fact, in the
World Semiconductor Trade Statistics (WSTS)
data, world semiconductor shipments have
continued to show significantly high growth since
fall 2025, surpassing prior forecasts, and there
has been a marked upward kink in the trend
(Chart B2 -1). In this situation, IT -related firms'
outlook has also grown increasingly confident,
with an increasing number of them noting that
demand for semiconductors will continue to
expand, led by AI -related demand, at least until
around 2028, albeit at a slower pace. This box
examines the impact on Japan's economy of the
solid increase in global AI-related demand.
The major characteristic of the ongoing AI
investment boom is that, with limited capacity for
increasing semiconductor production in the short
run -- i.e., the short -run s upply curve for
semiconductors being nearly vertical -- the impact
of the significant increase in AI -related demand
has been emerging more as "price increases"
than as "growth in volume" (Chart B2-2). This is in
stark contrast to the dot-com bubble period of the
late 1990s to around 2000, when semiconductors
saw sustained growth in volume and price
decreases, as many semiconductor
manufacturers -- including those in Japan --
competed to expand production facilities in
pursuit of "economies of scale."
220
260
300
340
380
420
460
500
540
98 01 04 07 10 13 16 19 22 25
World semiconductor shipments
Forecast as of May 2026
Forecast at each point in time
Source: WSTS.
Notes: 1. Based on staff calculations using WSTS data.
2. The figure for world semiconductor shipments for 2026/Q2 is the April-May
average.
3. Figures for the "forecast at each point in time" are as of May 2024, November
2024, May 2025, and November 2025.
Chart B2-1: World Semiconductor
Shipments
s.a., logarithmic value×100
CY
0.8
1.0
1.2
1.4
1.6
1.8
2.0
97 98 99 00 01
Price per unit
Shipment volume
Semiconductor
shipments
Source: WSTS.
Notes: 1. Based on staff calculations using WSTS data.
2. Effects of the cross term are allocated in proportion to the size of each factor.
Figures for the price per unit include price changes due to changes in quality.
3. Figures show the cumulative change from the reference point, with the
reference point's value set equal to 1. The reference points in the left- and right-
hand charts are 1997/Q1 and 2023/Q1, respectively.
4. In the right-hand chart, figures for 2026/Q2 are April-May averages.
Chart B2-2: Decomposition of World
Semiconductor Shipments
s.a., ratio
CY
1. Early 2000s 2. Current Phase
0.5
1.0
1.5
2.0
2.5
3.0
3.5
23 24 25 26
Price per unit
Shipment volume
Semiconductor
shipments
s.a., ratio
57
Under these circumstances, while Japan 's real
exports have been more or less flat, nominal
exports have risen significantly since fall 2025,
driven by higher export prices (Chart B2-3). In this
regard, as many Japanese semiconductor firms
primarily produce sem iconductors for
smartphones and for automotive use, the positive
impact of the AI investment boom on Japan's
IT-related exports remained limited until around
mid-2025, relative to Taiwanese and South
Korean competitors, which tend to excel in
advanced sem iconductors tailored for servers. 20
That said, with the expansion in storage demand
reflecting the widening scope of AI usage from
"training" to "inference," Japan's nominal exports
have gained price -driven momentum since late
2025. Indeed, a breakdown of export prices
shows a marked increase in the price of memory
chips (Chart B2 -4). Furthermore, metals and
related products, and machinery have also made
a significant contribution to the recent rise in
export prices. This is a reflection of the fact that
quite a few Japanese exporting firms have a
comparative advantage in the field of supporting
facilities, such as electricity and
telecommunications infrastructure, that are
essential for data centers.
Higher export prices induced by increased
AI-related demand as described above have
served to alleviate the worsening pressure on the
terms of trade exerted by the rise in import prices
stemming from the situation in the Middle East
(Chart B2-5). While this may have a positive effect
on domestic private demand through increased
20 See Box 4 of the April 2026 Outlook Report (Impact of
Increased AI-Related Demand on Japan's Exports).
-5
0
5
10
15
20
25
30
35
40
23 24 25 26
Export deflator
Real exports
Nominal exports
Sources: Bank of Japan; Ministry of Finance.
Note: Effects of the cross term are allocated in proportion to the size of each factor.
Chart B2-3: Developments in Nominal Exports
s.a., cumulative chg. from January 2023, %
CY
-5
0
5
10
15
20
25
30
35
23 24 25 26
Others
Chemicals and related products
Machinery
Metals and related products
Memory chips
All commodities
Chart B2-4: Developments in Export Prices
and AI-Related Commodities
Sources: Bank of Japan; Bloomberg.
Notes: 1. In the left-hand chart, "memory chips" are MOS memory integrated circuits.
"Metals and related products" include copper. "Machinery" excludes memory
chips. "Others" are textiles, other primary products and manufactured goods.
2. In the right-hand chart, "DRAM prices" and "NAND prices" are the prices of
DDR4 (8GB, 1GB × 8) and TLC (512GB), respectively. The latest figures are
for July 2026 (average for July 1-29).
cumulative chg.
from January 2023, %
CY
1. Export Prices
90
100
110
120
130
140
150
160
170
0
500
1,000
1,500
2,000
2,500
23 24 25 26
DRAM prices (left scale)
NAND prices (left scale)
Copper (right scale)
2. AI-Related Commodities
CY 2023=100 CY 2023=100
-20
-15
-10
-5
0
5
10
15
20
25
30
23 24 25 26
Import prices
Export prices
Terms of trade
Source: Bank of Japan.
Note: Terms of trade = Export price index on a yen basis / Import price index on a yen basis
Chart B2-5: Terms of Trade
cumulative chg. from January 2023, %
CY
58
profits of firms benefiting significantly from
increased AI -related demand, attention is
warranted on the following points when assessing
the impact of such a positive development.
First, the realized benefits of AI -related demand
are observed primarily among large firms in
certain manufacturing industries. In fact, using
input-output tables to estimate the impact of the
rise in prices of AI -related goods, including, for
example, supporting facilities related to data
centers, reveals that industries experiencing a
significant positive impact are concentrated in
electrical machinery, information and
communication technology (ICT) equipment, and
general machinery, indicating that spillover effects
on other industries are limited (Chart B2 -61).21
In contrast, the negative impact of the rise in
crude oil prices estimated by the same method
shows that a wide range of industries, including
nonmanufacturing, are subject to exposure (Chart
B2-62). As mentioned earlier, higher export
prices have alleviated part of the worsening
pressure being exerted on the terms of trade for
Japan as a whole that stems from the situation in
the Middle East. By economic entity, however,
those enjoying improvement in the terms of trade
are limited to certain well -performing large
manufacturing firms benefiting from AI -related
demand. For many other firms, it seems that the
negative impact stemming from the rise in input
costs has been outweighing the positive effects.
21 Since the input -output table s used in the analysis are as of
2020, attention should be paid to the possibility that the estimates
do not sufficiently factor in changes in industrial structures
associated with the recent expansion in AI-related goods.
Agriculture, forestry & fishery
Mining
Beverages & Foods
Textile products
Pulp, paper & wooden products
Chemical products
Other manufacturing
Ceramic, stone & clay products
Iron & steel
Non-ferrous metals
Metal products
General machinery, etc.
ICT equipment
Electrical machinery
Transportation equipment
Construction
Services
Commerce
Real estate
Transport & postal services
Information & communications
0
1
2
3
Sources: Ministry of Internal Affairs and Communications; Ministry of Finance; Bank of
Japan; WTO; OECD; WSTS.
Notes: 1. Estimated based on the 2020 Input-Output Tables for Japan, under the
assumption of a price shock with quantities held constant.
2. For the definition of AI-related goods, see Box 4 of the April 2026 Outlook
Report. Mineral fuels refer to coal mining, crude petroleum and natural gas.
3. "Other manufacturing" includes plastic products and rubber products. "General
machinery, etc." represents general-purpose machinery, production machinery,
and business oriented machinery. "ICT equipment" represents information and
communication electronics equipment and electronic components. "Services"
include business services.
inverted, change in intermediate input in response to a 5 trillion yen
increase in the import value of mineral fuels, tril. yen
2. Impact of the Rise in Crude Oil Prices
Negative impact
0
1
2
3
Agriculture, forestry & fishery
Mining
Beverages & Foods
Textile products
Pulp, paper & wooden products
Chemical products
Other manufacturing
Ceramic, stone & clay products
Iron & steel
Non-ferrous metals
Metal products
General machinery, etc.
ICT equipment
Electrical machinery
Transportation equipment
Construction
Services
Commerce
Real estate
Transport & postal services
Information & communications
Chart B2-6: Impact of Price Increases by
Industry
change in output value in response to a 5 trillion yen
increase in the value added of AI-related goods, tril. yen
1. Impact of the Rise in AI-Related Goods Prices
Positive impact
59
Second, propensity to spend has tended to be
lower than average among AI -related industries
(i.e., large firms in electrical machinery,
information and communication electronics
equipment, and general -purpose and production
machinery industri es). Indeed, the ratio of
business fixed investment to cash flow in these
industries has been lower than in other industries,
possibly because of the need to secure a buffer
against substantial swings in profits
accompanying the IT cycle (Chart B2 -71). O n
the back of their high capital intensity, their labor
share has also been relatively low; moreover, the
share has been on a clear downtrend in recent
years (Chart B2 -72). Given these points, the
impact of the rise in AI-related industries' profits in
stimulating domestic private demand is likely to
be smaller than that of other industries.
20
30
40
50
60
70
80
15 17 19 21 23 25
All industries
AI-related industries
Source: Ministry of Finance.
Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry,
Quarterly. AI-related industries are defined as consisting of large enterprises
with a capitalization of 1 billion yen or more in industries such as "general-
purpose and production machinery," "electrical machinery," and "information
and communication electronics equipment." All industries exclude "finance and
insurance," and for cash flow, "pure holding companies" are also excluded.
2. Ratio of business fixed investment to cash flow = Business fixed investment
(excluding software) / Cash flow. Cash flow = Depreciation expenses + Current
profits / 2. Labor share = Personnel expenses / Value added. Value added is
the sum of operating profits, personnel expenses, and depreciation expenses.
Chart B2-7: Characteristics of AI-Related
Industries
4-quarter backward moving avg., %
CY
1. Ratioof Business Fixed
Investment to Cash Flow
40
45
50
55
60
65
70
75
15 17 19 21 23 25
4-quarter backward moving avg., %
2. Labor Share
60
(Box 3) Background to and Impact of Upward Pressure on
Prices in Business-to-Business Transactions
As noted in the previous Outlook Report, a
distinctive feature of the current phase is that, as
firms' behavior has shifted more toward raising
prices, the speed at w hich cost increases are
passed through to prices has accelerated. 22 This
box analyzes the background to the recent
substantial rise in the producer price index (PPI),
and briefly examines how this has spilled over
into consumer prices.
Comparing developments in the corporate goods
prices following increased tension over the
situation in the Middle East with those at the time
of Russia 's invasion of Ukraine in 2022 shows
that, although the recent pace of import price
rises has been slower than in 2022, the quarterly
PPI inflation rate is clearly exceeding the rate
seen at that time (Charts B3 -1 and B3 -2). A
breakdown of the quarterly PPI inflation rate
indicates that there has been rapid growth in the
positive contribution not only of "petroleum and
coal products, nonferrous metals" -- whose prices
move in line with foreign exchange rates and
commodity prices such as crude oil prices -- but
also of basic materials such as "chemicals and
plastic products, etc. " and "machinery,"
suggesting that not only price hikes at the
upstream stage but also the price pass-through of
these hikes to midstream and downstream stages
has been advancing over a short period of time.
This greater activeness in price -setting behavior
22 See Box 2 of the April 2026 Outlook Report (Impact of a Surge
in Crude Oil Prices on Japan's Prices).
-2
-1
0
1
2
3
4
5
6
21 22 23 24 25 26
Other
Electric power, gas and water
Petroleum and coal products, nonferrous metals
Chemicals and plastic products, etc.
Machinery
Beverages and foods, etc.
All commodities
Source: Bank of Japan.
Notes: 1. Figures are adjusted for the hike in electric power charges during the summer
season.
2. Figures for "beverages and foods, etc." include agriculture, forestry and fishery
products.
Chart B3-2: PPI (Quarter-on-Quarter
Changes)
q/q % chg.
CY
100
110
120
130
140
150
100
120
140
160
180
200
21 22 23 24 25 26
Import price index (yen basis, left scale)
PPI (all commodities, right scale)
PPI (less energy, right scale)
CY 2020=100
CY
Source: Bank of Japan.
Notes: 1. Figures for the PPI (all commodities) are adjusted for the hike in electric power
charges during the summer season.
2. Figures for the PPI (less energy) exclude petroleum and coal products from
manufacturing industry products.
Chart B3-1: Corporate Goods Prices (1)
CY 2020=100
Russia's
invasion of
Ukraine
Increased tension
over the situation in
the Middle East
61
in business-to-business transactions can also be
confirmed in the results of various firm surveys
(Chart B3 -3). Notably, the current phase is
characterized by the following two developments.
First, in chemical products, the pass -through of
cost increases is progressing at a pace not seen
in the past (Chart B 3-41). Specifically, in (1)
upstream petroleum refinery products and
petrochemical basic products, efforts to pass on
higher costs swiftly and avoid margin
compression have expanded rapidly through the
introduction of surcharges and the revision of
pricing formulas; while in (2) midstream and
downstream products, concerns over shortages
and delivery delays stemming from raw material
scarcity, together with front -loaded demand to
secure inventories, seem to have significantly
strengthened sellers ' bargaining power. As a
result, even for downstream products such as
plastics, coatings and adhesives, for which the
pass-through of higher costs would normally take
around six months, sizeable price increases have
been implemented after only one to two months
(Chart B3-5).
Second, as global AI-related demand has climbed
further since fall 2025, upward pressure on the
prices of related goods has been intensifying
rapidly not only for exports, as seen in Box 2, but
also for domestic sales. In particular, (1) amid
intensified upward momentum in prices of such
items as copper on the back of increased demand
for electricity and telecommunications
infrastructure that serves as supporting facilities
for data centers, moves to pass on cost increases
to prices in the nonferrous metals and related
-1
0
1
2
3
4
14 15 16 17 18 19 20 21 22 23 24 25 26
Outlook for output prices
Outlook for general prices
y/y % chg.
CY
Source: Bank of Japan.
Note: Based on the Tankan. All industries and enterprises.
Chart B3-3: Firms' Inflation Outlook
(1 Year Ahead)
95
100
105
110
115
120
21 22
Russia's invasion of Ukraine
Increased tension over the situation in the Middle East
Chart B3-4: Corporate Goods Prices (2)
reference period=100
1. Chemicals and
Plastic Products
Source: Bank of Japan.
Notes: 1. Based on the PPI. The reference periods are 2021 for Russia's invasion of
Ukraine and 2025 for the increased tension over the situation in the Middle East.
The vertical lines indicate February 2022 and February 2026.
2. Figures for AI-related goods are those for "electronic components and devices,"
"electrical machinery and equipment," "information and communications
equipment," and "nonferrous metals."
CY
2. AI-Related Goods
95
100
105
110
115
120
21 22
reference period=100
25 26CY 25 26
62
products industries have become widespread; in
addition, (2) in the electronic components,
electrical machinery , and information and
communications equipment industries, upward
pressure on prices has also been increasing due
to the pas s-through of the surge in memory chip
prices (Chart B3-42).
AI, which is regarded as a general -purpose
technology, is expected to exert downward
pressure on prices through higher productivity
over the medium to long term, as it becomes
more deeply embedded in the economy and
society, with workers and firms becoming
increasingly adaptive to the technology . In the
short term, however, the effects of the investment
boom in expanding aggregate demand are likely
to dominate, exerting upward pressure on prices.
In this context, since the start of 2026, PPI in
major countries and regions, including Japan, has
been rising at a n accelerated pace in a highly
synchronized manner . Given that the global
economy has remained resilient over this period,
the recent global rise in the PPI highly likely
reflects not only the shock of higher crude oil
prices, which negatively affects economic activity,
but also the pos itive global demand shock
stemming from increased A I-related demand
(Chart B3-6).
To examine this possibility, a dynamic factor
model was used to decompose PPI inflation rates
in six economies (Japan, the United States, the
euro area, South Korea, China, and Taiwan) into
(1) a global inflation trend (GIT) that is common
across regions and goods categories, (2)
common global factors specific to particular
Sources: Ministry of Economy, Trade and Industry; Bank of Japan; Nikkei Inc.
Notes: 1. Figures show the cumulative percentage changes in the corresponding PPI item
from February 2026 to June 2026. For crude oil, the figure refers to the
percentage change in Dubai crude oil prices from February 2026 to March 2026.
Darker background shading indicates a larger change.
2. The time frames shown at the bottom represent the pass-through lag, roughly
estimated based on the historical average relationship between crude oil prices
and the PPI.
3. Since toluene is not surveyed in the PPI, its change is proxied by that of the
"petrochemical aromatic products (except synthetic resin)," the higher-level PPI
category to which it belongs. The classification of items included in midstream
products follows that of the Ministry of Economy, Trade and Industry.
Chart B3-5: The Pass-Through of Crude
Oil and Naphtha Price Increases
≤ 3 Months0 Months ≤ 6 Months ≤ 12 Months
Petroleum-related products Final products
Pharmaceuticals
-4.4
Passenger
motor cars
+0.6
Iron, steel, and
building
materials
+2.9
Electrical
machinery and
equipment
+2.0
Printing and
publishing
+2.9
Petroleum
refinery
products
Downstream
products
Petrochemical products
Naphtha
+83.2
Gasoline
+9.6
Diesel oil +42.6
Heavy fuel oil
+31.5
Jet fuel oil
+31.5
Kerosene +21.1
Asphalt and
lubricating oil
+39.1
LPG +48.3
Petrochemical
basic products
Ethylene
+75.0
Propylene
+71.4
Benzene
+23.0
Xylene
+51.6
Toluene
+42.0
Butadiene
+50.5
Midstream
products
Polyethylene,
vinyl chloride,
surfactant,
etc. +27.8
Polypropylene,
etc. +41.0
Polystyrene,
nylon,
etc. +35.3
Polyester,
PET resin,
etc. +10.0
Solvent,
etc. +34.6
Synthetic
rubber,
etc. +29.2
Crude oil
+85.9 Plastic
products
+8.2
Textile
products
+3.2
Coatings
and
adhesives
+7.2
Rubber
products
+1.4
-24
-12
0
12
24
36
48
-12
-6
0
6
12
18
24
20 21 22 23 24 25 26
Japan (left scale)
United States (left scale)
South Korea (left scale)
China (left scale)
Taiwan (left scale)
Euro area (right scale)
y/y % chg.
CY
Sources: Bank of Japan; Haver; CEIC.
Note: Figures for the euro area are the PPI for industry excluding construction, while those
for other countries and regions are the PPI for all commodities.
Chart B3-6: Global Developments in the PPI
y/y % chg.
63
goods categories, and (3) country - and
region-specific factors that are common across
goods categories within each economy (Chart
B3-7). 23 The estimation results for the GIT
suggest that, while the figures are highly
correlated with the Global Supply Chain Pressure
Index, which captures the supply-demand
tightness in global supply chains, the level of
global upward pressure on prices is currently
exceeding the stan dard range of fluctuations
observed in the past.
Next, to investigate the drivers of changes in the
GIT, a sign -restricted vector auto -regression
(VAR) model with three variables -- world
production, the GIT, and crude oil prices -- was
estimated to identify (1) global demand shocks,
(2) global supply shocks, and (3) crude oil price
shocks.24 The historical decomposition of the GIT
indicates that, although most of the recent
increase in the GIT is accounted for by crude oil
price shocks, global demand shocks are
responsible for roughly 30 to 40 percent of the
rise (Chart B3-8). While this analysis alone cannot,
of course, identify the specific source of global
demand shocks, the fact that th eir timing lines up
with recent increases in copper and memory chip
prices suggests that the increase in global
AI-related demand and its spillovers may be
playing a role. Furthermore, when the impact of
the identified global demand shock on Japan 's
23 The analysis draws on the following study:
Akinci et al. ( 2025), "Global Trends in U.S. Inflation Dynamics, "
Federal Reserve Bank of New York Liberty Street Economics,
February 27, 2025.
24 The VAR model is constructed with reference to the following
study:
Ha et al. (2025), "What Explains Global In flation," IMF Economic
Review, vol. 73, pp. 522-555.
-10
-8
-6
-4
-2
0
2
4
6
-5
-4
-3
-2
-1
0
1
2
3
01 04 07 10 13 16 19 22 25
GIT (left scale)
± 1 standard deviation bands
(left scale)
Global Supply Chain Pressure
Index (right scale)
deviation from avg., standard deviations
CY
Sources: Bank of Japan; New York Fed; Haver; CEIC.
Note: Each factor is extracted from the PPI inflation rates of the eight goods categories
(beverages & foods, petroleum & coal products, chemicals & related products, metal
products, general purpose machinery, electrical machinery & equipment, information &
communications equipment, and transportation equipment) in the six countries and
regions (Japan, the United States, the euro area, South Korea, China, and Taiwan).
Figures for the GIT are normalized using the average and standard deviation for the
estimation period. Figures for 2026/Q2 are April-May averages.
Chart B3-7: Global Inflation Trend (GIT)
1. Extraction of GIT
PPI inflation rate
by country/region and
goods category (m/m)
Trend
factors
Temporary
factors
Trend
factors
Global common factors
(Global Inflation Trend, GIT)
Global factors specific to goods category
Factors specific to country/region
Factors specific to country/region
and goods category
Estimation
period
January 2000
-May 2026
2. Developments in GIT
index
64
CPI (all items less food and energy) is estimated
using a local -projection approach, the results
suggest that this shock has an effect in pushing
up the level of the CPI (all items less food and
energy) in a persistent manner (Chart B3-9).
Furthermore, decomposing trend factors of
Japan's PPI inflation rate into the contributions of
factors such as the GIT and Japan -specific
factors shows that, up until the COVID -19
pandemic, the GIT accounted for m ost of the
fluctuations in the PPI, but since around 20 22,
Japan-specific factors have consistently made a
large positive contribution (Chart B3 -10). In this
regard, Japan -specific factors correlate highly
with the level of the real effective exchange rate
(Chart B3 -11). Given this empirical observation,
the d epreciation of the yen 's real effective
exchange rate since 2022, which indicates a
decline in the relative price of Japanese goods,
may have exerted sustained upward pressure on
Japan's PPI through arbitrage mechanisms of
narrowing price differentials bet ween Japan and
other economies, equalizing relativel y lower
domestic goods prices with foreign goods
prices.25
Looking ahead, the outlook is as follows. (1) For
products such as chemical products at the
upstream stage , the fall in crude oil prices is
expected to induce selling prices to be on a
declining trend, in line with surcharges and pricing
25 This analysis of the adjustment mechanisms underlying price
differentials associated with movements in the real exchange rate
draws on, for example, Engel (2019), "Real Exchange Rate
Convergence: The Roles of Price Stickiness and Monetary Policy,"
Journal of Monetary Economics, vol. 103, pp. 21-32.
-4
-3
-2
-1
0
1
2
3
20 21 22 23 24 25 26
Crude oil price shocks
Global supply shocks
Global demand shocks
GIT
deviation from avg., standard deviations
CY
Sources: Bank of Japan; CPB Netherlands Bureau for Economic Policy Analysis; Haver;
CEIC; FRED.
Notes: 1. "+" in the table indicates a response in the same direction as the shock, while "-"
indicates a response in the opposite direction.
2. The estimation period is 2000/Q2-2026/Q2. In the estimation, the figure used for
world production in 2026/Q2 is that for April. For other variables, the figures used
for 2026/Q2 are April-May averages.
3. Figures for the GIT are normalized using the average and standard deviation for
the estimation period.
Chart B3-8: Decomposition of Changes in GIT
1. Identification Restrictions (Sign Restrictions)
2. Historical Decomposition of GIT
Shocks / Variables World
production GIT Crude oil
prices
Crude oil price
shocks － ＋ ＋
Global supply
shocks ＋ － ＋
Global demand
shocks ＋ ＋ ＋
0.0
0.2
0.4
0.6
0.8
1.0
0 1 2 3 4 5 6 7 8 9 10 11 12
Impact on the CPI (excl. food,
energy, and institutional factors)
Sources: Ministry of Internal Affairs and Communications; Bank of Japan; CPB
Netherlands Bureau for Economic Policy Analysis; Haver; CEIC; FRED.
Notes: 1. The chart shows the impulse response to a positive one standard deviation
global demand shock, estimated using local projection. The global supply shock,
the oil price shock, and 4-quarter lagged values of the dependent variable are
controlled for. The estimation period is 2001/Q2-2026/Q2. The CPI figure for
2026/Q2 is the April-May average. The shaded area indicates the 90th
percentile band.
2. Institutional factors = the effects of the consumption tax rate changes and
policies concerning the provision of free education + the reduction in mobile
phone charges in 2021 + travel subsidy programs. Figures are staff estimates.
Chart B3-9: Impact of a Global Demand
Shock on Japan's CPI
impact of a one standard deviation demand shock on the level, %
quarters
65
formulas. By contrast, for chemical products at
the midstream and downstream stages, since
their price increases incorporate the pass-through
of higher labor and logistics costs, these prices
are likely to remain downwardly rigid. (2) On the
other hand, the spillover effects of the global
demand shock from increased AI-related demand,
and the past yen dep reciation and associated
pressure to arbitrage away price differentials
between Japan and other economies, are highly
likely to continue exerting persistent effects for
some time. Taken together, these considerations
suggest that, even if crude oil prices continue to
decline, domestic goods prices excluding energy
will remain subject to persistent upward pressure
for the time being.
-6
-4
-2
0
2
4
6
8
10
12
15 16 17 18 19 20 21 22 23 24 25 26
Other factors
Japan-specific factors
GIT
Trend factors for Japan
PPI (manufacturing
industry products)
Sources: Bank of Japan; Haver; CEIC.
Notes: 1. Figures for the PPI (manufacturing industry products) exclude the effects of the
consumption tax rate changes.
2. Figures for trend factors for Japan for 2026/Q2 are April-May averages.
Chart B3-10: Decomposition of Changes in
Japan's PPI
y/y % chg.
CY
-20
0
20
40
60
80
100
120
140
160-2
-1
0
1
2
3
4
5
6
7
01 05 09 13 17 21 25
Japan-specific factors (left scale)
Real effective exchange rate (right scale)
y/y % chg.
CY
Sources: Bank of Japan; Haver; CEIC; BIS.
Note: Figures for the real effective exchange rate are based on the broad effective exchange
rate indices.
Chart B3-11: Developments in Japan-
Specific Factors
inverted, CY 2020=100
66
(Box 4) Effects of Policy Interest Rate Hikes on Households
The Bank changed its large -scale monetary
easing framework in March 2024 and since then
has gradually raised the policy interest rate to 1
percent, thereby adjusting the degree of monetary
accommodation. In line with the increase in the
policy interest rat e, deposit rates, both for
ordinary deposits and time deposits, have risen
(Chart B4 -1). Lending rates have also risen,
reflecting the rise in the base rate to which they
are referenced. Looking at housing loan rates,
interest rates on floating -rate loans, which
account for the majority of both new lending and
outstanding balances, have increased in tandem
with short-term prime rates, while interest rates on
fixed-rate loans have also risen, mainly reflecting
developments in long -term interest rates (Chart
B4-2). 26 This box examines how the rise in
deposit and lending rates affects households,
taking into account the structure of household
assets and liabilities.
Starting with a look at the balance sheet of
Japan's household sector, on the asset side ,
households hold around 2,400 trillion yen in
financial assets, of which deposits account for
roughly 1,000 trillion yen, followed by insurance
and pensions at about 600 trillion yen, and
equities and investment fund shares at around
550 trillion yen (Cha rt B4-3). On the liability side,
total debt amounts to only about 400 trillion yen,
26 In recent years in Japan, when households take out a housing
loan, many choose floating -rate loans; according to a survey
conducted in January 2026 by the Japan Housing Finance Agency,
75 percent of surveyed n ew housing loan borrowers chose
floating-rate loans in the first half of fiscal 2025.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
16 17 18 19 20 21 22 23 24 25 26
Fixed-rate (initial 10-year fixed)
Floating-rate
Source: Published accounts of individual banks.
Note: Figures show medians of some major banks (preferential rates are taken into account).
Figures up to 2020 cover loans with guarantee fees, and those from 2021 cover loans
with administrative fees.
Chart B4-2: Interest Rates on Housing
Loans
%
CY
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
06 08 10 12 14 16 18 20 22 24 26
Time deposits (5-year)
Time deposits (1-year)
Ordinary deposits
Chart B4-1: Deposit Rates
Source: Bank of Japan.
Note: Figures are averages of deposit rates at financial institutions such as domestically
licensed banks.
%
CY
67
with housing loans making up more than half of
that. An increase in the policy interest rate brings
about an increase in interest income on the asset
side through higher deposit rates, while on the
liability side it leads to a rise in the interest
payment burden on housing loans and other debt.
However, since the total amount of deposits
significantly exceeds the outstanding amount of
housing loans and other debt, househol ds as a
whole are likely to benefit from the positive effects
of higher interest rates , even when considering
the differences in interest rate levels.
It should be noted, however, that household
balance sheets differ markedly across age groups.
Looking at the composition of assets and liabilities
by age of the household head, financial assets
increase with age, mainly in the form of deposits
(Chart B4-4). On the liability side, households in
their 30s and 40s have large housing loan
balances, and, in particular for those in their 30s ,
total liabilities exceed total assets. For these
households with housing loans, the increase in
the repayment burden associated with higher
interest rates may lead them to act more
cautiously in their spending.27
In this context, for floating -rate housing loans,
which account for the majority of housing loans,
mechanisms such as the "5-year rule" are often in
place to curb a sharp increase in repayment
27 In recent years, rising real estate and housing prices have led
to larger housing loan amounts, which has also added to
households' repayment burden.
Ordinary
deposits
Housing loans
Time deposits
Consumer
credit
Other deposits
and currency
Other liabilities
Equity and
investment
fund shares
Insurance
and pensions,
etc.
Other assets
0
500
1,000
1,500
2,000
2,500
Assets Liabilities
Source: Bank of Japan.
Note: Figures are as of the end of March 2026. The figure for equity and investment fund
shares is the amount outstanding of equity and investment trust beneficiary certificates
(based on market values).
Chart B4-3: Balance Sheet of Households
tril. yen
-15
-10
-5
0
5
10
15
20
25
30
Under 30 30s 40s 50s 60 and
over
Ordinary deposits Time deposits
Public and corporate bonds Stocks, etc.
Other financial assets Housing loans
Other loans Net financial assets
Source: Ministry of Internal Affairs and Communications.
Note: Figures show the average balance sheet per household for each age group as of 2019.
Chart B4-4: Balance Sheets by Age of
Household Head
mil. yen
Assets
Liabilities
68
amounts.28 In addition, the Bank's policy rate
hikes have been predicated on the continued
improvement in employment and income
conditions, including the steady wage gains in
recent years, and these developments should be
taken into account alongside the rate hike itself.
Recently, reflecting a particularly acute shor tage
of younger workers, many firms have been
granting relatively large wage increases to
employees in their 20s and 30s (Chart B4 -5).
These developments have worked to ease the
repayment burden of housing loans for these age
groups. Moreover, in recent ye ars, households'
holdings of equities have increased, and for those
holding equities, dividend income has risen and
the wealth effects from higher stock prices have
been observed (Chart B4-6).
Against this background, even amid rising
housing loan rates, private consumption has been
resilient so far. It is necessary to continue to
carefully monitor how increases in the policy
interest rate affect household behavior, taking into
account factors such as differences in asset and
liability structures across age groups.
28 For floating-rate housing loans, it is often the case that, a
"5-year rule" is applied , under which the monthly repayment
amount is fixed for five year s. In addition, even when the
repayment amount is revised, a "125 percent rule" is frequently
applied, which caps the revised monthly repayment at no more
than 1.25 times the previous amount.
0
100
200
300
400
500
600
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Source: Bank of Japan.
Note: Figures are the amount outstanding of equity and investment trust beneficiary
certificates (based on market values).
Chart B4-6: Household Holdings of
Equity, etc.
tril. yen
CY
0
2
4
6
8
10
12
14
16
18
20
0
50
100
150
200
250
300
350
400
450
500 Rate of change (from 2020 to 2025, right scale)
Scheduled cash earnings (2025, left scale)
Scheduled cash earnings (2020, left scale)
Source: Ministry of Health, Labour and Welfare.
Note: Figures are monthly scheduled cash earnings.
%thous. yen
Chart B4-5: Wages by Age Group
age group