Japan Week Ahead: BOJ on Hold Amid Mideast Conflict, US Trade Uncertainty, While Pointing to Need to Raise Policy Rate Further to Neutral Level

–July Tokyo CPI Seen Ticking Up Closer to BOJ’s 2% Target as Iran War Has Boosted Prices, Import Costs High on Yen’s Slide to Nearly Four-Decade Low
–June Factory Output to Pose 3rd Straight Rise amid Global Demand for Computer Chips, Non-Ferrous Metals, Easing Impact of US Tariffs on Autos

By Max Sato

(MaceNews) – The Trump administration’s new 10% to 12% worldwide tariffs replacing its temporary 10% import duties that have just expired may have only a limited impact on recovering Japanese exports but the renewed U.S. trade war on a global scale adds to the already high uncertainty over growth and inflation amid the lingering Mideast conflict. 

Some Japanese goods like sheets and soy sauce exported to the United States will see their tariff rates drop to 12.5%, the new rate for Japan set by Washington, while others such as LED (light-emitting diode) lamps and contact lenses are currently levied slightly lower duties. The 15% tariffs on automobiles, auto parts, steel and aluminum shipped from Japan is expected to stay in place.

Economy, Trade and Industry Minister Ryosei Akazawa, Japan’s chief trade negotiator, called the U.S. action “regrettable” at a news conference on Friday. He also said Tokyo had confirmed with Washington that Japan would not face any additional tariffs beyond those agreed upon last year. But judging from the erratic patterns of President Trump’s decision-making, it is still uncertain how the U.S. trade rows with the world will affect Japan’s wobbly economic recovery.

The latest U.S. punitive taxes on imports from 60 trading partners accounting for 99% of U.S. imports are based on its claim that they have inadequately enforced bans on goods produced by forced labor. Washington is also looking into whether 16 countries including Japan and China are overproducing, and as a result cutting prices and hurting U.S. firms in global markets.

Japan is already facing inflationary pressures from labor shortages, high import costs under the weak yen and elevated energy and commodities prices due to the Middle East conflict.

Against this backdrop, the Bank of Japan’s policymakers are expected to decide, possibly in a unanimous vote, to leave the policy interest rate at 1% after conducting their fifth interest rate hike in the current cycle last month. They have maintained a measured pace of rate increases, at about a six-month interval recently, except when they stood pat for 11 months to monitor the impact of the Trump tariffs last year.

In its June policy decision statement, the BOJ said it “will continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation, noting that underlying consumer inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhat above 1%.

Tuesday, July 28
1400 JST (0500 GMT/0100 EDT Tuesday, July 28) – The Bank of Japan releases its core measures of consumer price index for June. The BOJ excludes institutional factors: the effects of sales tax rate changes, free education, fuel and utility subsidies, reduction in mobile phone charges in 2021 and travel subsidy programs during the pandemic.

Data from the Ministry of Internal Affairs and Communications released on July 24 showed that consumer inflation accelerated slightly in July due to a smaller drop in gasoline prices and larger markups in other fuels, which limited the impact of a continued moderation in processed food markups. The year-on-year increase in the core CPI (excluding fresh food) accelerated to 1.6% after being unchanged at 1.4% in May and decelerating sharply to a four-year low of 1.4% in April from 1.8% in Mach.

The BOJ’s core CPI (excluding fresh food and institutional factors) rose 2.7% on the year in May after rising 2.8% in April while the annual rate of the government’s core CPI (excluding fresh food) was flat at 1.4% in May, thanks to fuel subsidies aimed at easing the impact of the Mideast conflict as well as free high school education that took effect in April.

The BOJ’s another core measure, the CPI minus fresh food, energy and institutional factors, posted a slower 2.1% increase on the year in May after rising 2.2% in April and 2.6% in March. The annual rate of the government’s core-core CPI (excluding fresh food and energy) stood at 1.8% in May, easing further from 1.9% in April and 2.4% in March.

Wednesday, July 29
– TBA The Cabinet Office releases the government’s monthly economic report for July. Last month, it was released at around 1650 JST on June 30 (0750 GMT/0350 EDT the same day).

In the June report, the government continued to predict that the economy would stay on a gradual recovery track, pointing that its fuel subsidies and free high school education were helping ease inflation and hot weather was lifting consumer sentiment, but also warned that the Mideast conflict had triggered a spike in producer and import costs. It maintained its overview, saying that the economy is “recovering at a moderate pace but the impact of the situation in the Middle East needs a close attention.”

Thursday, July 30
– The Bank of Japan holds a two-day policy meeting.

Friday, July 31
0830 JST (2330 GMT/1930 EDT Thursday, July 30) The Ministry of Internal Affairs and Communications releases July Tokyo CPI.
Mace News median: total CPI +1.8% y/y (range: +1.8% to +1.9%) vs. June +1.7%; core CPI (ex-fresh food) +1.8% (range: +1.7% to +1.8%) vs. June +1.6%; core-core CPI (ex-fresh food, energy) +2.0% (range: +1.9% to +2.1%) vs. June +1.9%

Consumer inflation in Tokyo, a leading indicator of the national trend, is forecast to continue accelerating in July as the protracted depreciation of the yen has made imports more expensive and retailers are reflecting higher labor, materials, packaging and transportation costs amid widespread worker shortages and the lingering Mideast conflict.

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

The core measure (excluding fresh food) is forecast to post a 1.8% rise on year after the annual rate edged up to 1.6% in June and slowing to 1.3% in May from 1.5% in April, both which were the lowest since 0.8% in March 2022. The core rate hit a recent peak at 3.6% in May 2025, when processed food price hikes were sharp in the aftermath of domestic rice shortages.

The annual rate of the total CPI is also expected to rise to 1.8% after accelerating to 1.7% in June and easing to 1.4% in May from April’s 1.5%. The year-on-year increase in the core-core CPI (excluding fresh food and energy), which is not directly impacted by fuel subsidies, is seen ticking up further to 2.0% after rising to 1.9% in June and slowing to 1.6% in May from 1.9% previously.

The upward pressures from sustained wage hikes and the Iran war mitigated the price-cutting impact of nationwide fuel subsides in place since mid-March, which has capped the average regular gasoline price at ¥170 per liter. The Tokyo CPI data for June showed gasoline prices fell 1.3% on the year, with the pace of decline slowing from an 8.1% drop in May while the prices for propane were up 7.6% (the same as in May) and those for diesel rose 11.0% (vs. +9.8% in May), leading to a smaller 2.3% drop in overall energy prices in June, compared to a 3.7% fall in the prior month.

There is a downward pressure from the Tokyo metropolitan government’s four-month summertime program to wave its base water charges but its initial impact has faded as the Tokyo prefecture had a similar scheme last summer.

Friday, July 31
0830 JST (2330 GMT/1930 EDT Thursday, July 30) The Ministry of Internal Affairs and Communications releases the June unemployment rate.
Mace News median: 2.5% (range: 2.4% to 2.5%) vs. 2.5% in May, 2.5% in April, 2.7% in March, 2.6% in February, 2.7% in January, 2.6% from August to December 2025, 2.4% in July, which was a four-month low.

The seasonally adjusted unemployment rate in Japan is expected to remain low and stable at 2.5% in June after being steady in May, reflecting widespread labor shortages. It fell to the current level in April from 2.7% in March.

Labor shortages continue in the sectors with long work hours and lower pay, notably daycare, medical, transport and construction. Last year, unemployment was stuck at 2.6% from September to December after rising to the level in August from a five-month low of 2.4% in July.

Payrolls likely posted a fifth straight rise after marking a rare year-on-year drop in January. The increase in May was led by hotels/restaurants and medical/welfare services. Manufacturing jobs posted their first gain in many months. In recent months, employment gains have been in both regular and non-regular positions (sharp gains in women and non-regular jobs) after the total number of employed unexpectedly posted its first year-on-year drop in 42 months in January for one-off factors.

The government continues to describe employment conditions as “showing signs of improvement” in its latest monthly economic report for June, unchanged since the last upgrade for the category in June 2023.

Friday, July 31
0850 JST (2350 GMT/1950 EDT Thursday, July 30) The Ministry of Economy, Trade and Industry releases preliminary June industrial output, the outlook for July, August.
Mace News median: +0.5% m/m (range: +0.3% to +1.8%) vs. May revised to +0.1% from +0.5%; +3.4% y/y (range: +3.2% to +4.7%) vs. May revised to -2.1% from -1.7%

Japan’s industrial production is expected to post its third straight rise in June, up a modest 0.5% on the month, possibly led by a pickup in the auto sector as the base effect of stiff U.S. tariffs on vehicles and metals has waned. It also mirrors strong export demand for computer chips and non-ferrous metals. It would follow a downwardly revised slight 0.1% gain in May and a 0.5% rebound on a 0.4% dip in March.

Japan has increased crude oil imports from other regions to reduce its heavy reliance on the Middle East. The on-and-off blockade of Strait of Hormuz, the crucial pathway, choked off energy and commodities exports from the Mideast Gulf, causing shortages of naphtha and other materials and hurting output of plastics and resins used in vehicles, appliances and food packages.

Last month, the monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rise 2.6% on the month in June, led by a rebound in the production of equipment to produce flat panel displays, general machinery to make analytical instruments and electric/telecom products (laptop computers), all of which dropped in May. Factory output was projected to be flat in July.

The ministry has maintained its assessment that industrial output was “taking one step forward and one step back.” The last change was made in the July 2024 report, when it upgraded its view.

The focus is also on capital goods shipments (excluding transport equipment) for the April-June quarter after they rose a solid 1.9% in the first quarter on top of a 1.6% rebound in Q4. This segment of the industrial production data helps forecast how business investment performed in the Q2 GDP data, due Aug. 17, after unexpectedly slipping 0.7% on quarter in Q1 to trim 0.1 percentage point off GDP growth.

The gross domestic product is expected by economists to post a slower 0.8% annualized growth in Q2 following a 0.5% rise on quarter (1.8% annualized) in Q1, when rebounds in net exports and public works spending as well as resilient consumer spending led the second quarterly expansion, recovering from a 0.6% (2.3% annualized) contraction in the third quarter of 2025.

Friday, July 31
0850 JST (2350 GMT/1950 EDT Thursday, July 30) The Ministry of Economy, Trade and Industry releases preliminary June retail sales.
Mace News median: +2.6% y/y (range: +1.8% to +5.2%) vs. May revised to +5.0% from +5.3%; -1.7% m/m (range: -2.0% to -1.2%) vs. May revised to +1.7% from 1.9%

Japanese retail sales are forecast to post a modest 2.6% rise on the year in June, as demand for vehicles continued to pick up, generally high stock prices prompted consumers to shop for luxury goods and hot weather lifted sales of air conditioners and fans. Demand for big-screen TVs ahead of and during the FIFA World Cup soccer games from June 11 to July 19 also helped.

There is persistent solid demand for drugs/cosmetics from both domestic consumers and overseas visitors. By contrast, government subsidies have put a lid on retail prices of gasoline and diesel, exerting downward pressure on fuel sales.

Last month, the Ministry of Economy, Trade and Industry maintained its assessment after a January upgrade, saying retail sales are “on a gradual uptrend.”

On the month, retail sales are forecast to mark their first drop in four months, down 1.7%, after a downwardly revised 1.7% gain in May.

Friday, July 31
c.1130 JST (c.0230 GMT Friday, July 31/c.2230 EDT Thursday, July 30) The Bank of Japan releases the outcome of its two-day policy board meeting in a monetary policy statement. It also releases the quarterly Outlook Report, in which board members update their medium-term growth and inflation projections as well as risk analysis.

The Bank of Japan’s nine-member board is widely expected to stand pat at its next meeting on July 30-31 after it decided to raise the target for the overnight interest rate to 1% from 0.75% in a 7 to 1 vote in June, citing growing upside risks to inflation triggered by the Mideast conflict. The bank is expected to raise rates further by year-end. The rate hike at the June15-16 meeting is the fifth in the current cycle that began in March 2024 and part of the gradual process to unwind large-scale monetary easing that lasted for about a decade since April 2013.

For a clearer trend in consumer inflation, BOJ officials are closely watching the bank’s own core measures that exclude the effects of institutional factors (sales tax cuts, energy subsidies, etc.), which are pointing to an uptrend in underlying inflation above the bank’s 2% target.

But the bank is in no hurry to follow up with a back-to-back rate hike as inflation expectations among firms are still around 2% and subsidies and other fiscal measures are expected to continue to offset some of the upward pressures on consumer prices exerted by rising costs of imports due to the weak yen, labor amid widespread worker shortages and transportation and packaging triggered by the Iran war. Bank officials also are looking at downside risks to consumer spending and business investment amid lingering geopolitical risks. The fate of a U.S.-Iran ceasefire remains uncertain, pending the safe reopening of the Strait of Hormuz, the crucial pathway for energy and commodities exports from the Mideast Gulf.

Friday, July 31
1530-1630 JST (0630-0730 GMT/0230-0330 EDT Friday July 31) BOJ Governor Kazuo Ueda holds a news conference to discuss the board’s decision. The focus is on how Ueda describes inflation expectations among households and businesses and whether he thinks upside risks to inflation have risen in recent weeks.