Japan Week Ahead: BOJ June Quarter Tankan Business Survey to Show Mideast Conflict Dented Confidence Slightly, Pushed Up Costs for Many Sectors

–Hot Weather, Rising Stock Markets Seen Lifting Retail Sales in May, Job Creation Continues, Factory Output to Extend Monthly Gain on Export Demand

By Max Sato

(MaceNews) – The tentative U.S.-Iran peace agreement has led crude oil prices lower to pre-war levels, calming jitters among policymakers and investors, but Japanese households and businesses will still be hit by the remaining impact of elevated global energy and commodities prices that have persisted until recently.

Producer inflation in Japan accelerated at a faster-than-expected pace in May, up by a three-year high of 6.3% on the year, as import costs continued rising amid the Middle East conflict and supply disruptions and strong demand boosted non-ferrous metal prices further.

The initial spike in crude oil prices and the impact of shortages of naphtha and other materials have moderated slightly from the previous month but the June producer prices data due on July 10 is likely to show upstream costs remain high, which in turn will be reflected in consumer prices in coming months.

For the coming week, the hot summer weather and stock market wealth effects are forecast to have propped up sluggish retail sales in May. Retail and travel demand ahead of and during the FIFA World Cup soccer matches is expected to assist Japan’s lukewarm economic growth but may not score big as many households are still cautious about spending amid elevated costs for daily necessities.

May jobs data is likely to show year-on-year employment growth continued at a solid pace for a fourth straight month amid widespread labor shortages while the unemployment rate stayed low and stable at 2.6%, up slightly from 2.5% in May.

Factory output is expected to post its second straight rise in May, thanks to solid export demand for production machinery from Europe, global needs for computer chips and a pickup in shipments of vehicles to the key U.S. market. Production is forecast to mark a slight drop on the year after five months of increase.

The focus is on the Bank of Japan’s quarterly Tankan business survey. It is expected to indicate a slight decline in sentiment among large manufacturers in the June quarter, hit by elevated global energy and commodities costs amid the lingering Mideast conflict. The U.S. and Iranian leaders signed an agreement to end the war on June 17 but its positive effects are unlikely to be reflected in the June survey as most firms are believed to have responded by the middle of the month.

BOJ officials will also look at how the Iran war pushed up the costs for business operations in the June quarter and how much the surveyed firms reflected the cost increases in sales prices. Their focus is also on how higher borrowing costs are affecting corporate profits and whether they are hurting small businesses.

Days before the BOJ’s board decided to conduct the bank’s fifth interest rate hike in the current cycle and the first since December at its June 15-16 meeting, Governor Kazuo Ueda said slightly higher interest rates as a result of the past rate increases since March 2024 were not dampening corporate demand for new funding either via borrowing from banks or issuing debt.

Ueda also noted in a June 3 speech that bankruptcies were on the rise but that most of them had been caused by higher prices and labor shortages, and not by higher interest rates.

BOJ board members will see the Tankan results on July 1 and reports on regional economic conditions from BOJ branch managers on July 9 to update their medium-term growth and inflation projections as well as risk analysis in the quarterly Outlook Report to be issued after the July 30-31 policy meeting.

They will debate how soon the bank should conduct a follow-up rate hike, which is widely expected to take place by the end of the year. After the June rate hike, the bank 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.

Monday, June 29
0850 JST (2350 GMT/1950 EDT Sunday, June 28) The Ministry of Economy, Trade and Industry releases preliminary May retail sales.
Mace News median: +3.5% y/y (range: +1.0% to +4.3%) vs. April revised up to +2.8% from +2.1%; +0.6% m/m (range: -2.3% to +1.0%) vs. April revised up to +2.1% from 1.3%

Japanese retail sales are forecast to post a 3.5% rise on year in May for the fastest pace of increase since 3.5% in March 2025 as booming stock prices prompted consumers to shop for luxury goods and hot weather boosted summer clothing sales. The weak yen has also revived high spending by visitors from Asia despite a continued decline in sales to Chinese tourists over bilateral diplomatic rows.

Overall sales are also expected to be propped up by the recent pickup in vehicle purchases and persistent demand for drugs/cosmetics. By contrast, fuel prices, and thus sales, have stayed below their year-earlier levels, thanks to subsidies aimed at easing the impact of the Mideast conflict.

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

Industry data showed department store sales posted the fifth straight year-on-year increase in May, up 8.3%, accelerating from a 5.2% gain in April, as spending by visitors from overseas marked a double-digit percentage jump as seen the previous month. There was one more public holiday and one more Sunday compared to a year earlier, which led to solid sales to domestic customers.

The yen remains stubbornly weak despite rounds of currency market intervention by the Ministry of Finance from late April to early May, which supported the purchasing power of visitors from Hong Kong, Taiwan, Malaysia and Singapore, offsetting a 5% drop in spending by Chinese tourists, according to the Japan Department Stores Association.

Retailers are counting on solid demand for big-screen TVs, beverages and clothing (soccer uniforms) in May and June ahead of and during the World Cup soccer tournament that lasts for a little over a month from June 11 to July 19. There was similar demand four years ago but it was partly dampened by restrictions on personal and business activities during the pandemic.

Tuesday, June 30
0830 JST 0830 JST (2330 GMT/1930 EDT Monday, June 29) The Ministry of Internal Affairs and Communications releases the May unemployment rate.
Mace News median: 2.6% (range: 2.5% to 2.6%) vs. 2.5% in April, 2.7% in March, 2.6% in February.

The seasonally adjusted unemployment rate in Japan is expected to remain low and stable at 2.6% in May amid widespread labor shortages after falling to 2.5% in April from 2.7% in March, which was caused by a sharp 10.9% drop on the month in the number of those who began job hunting, which means fewer people were counted as being unemployed. In the April report, job cuts and retirements were unchanged for the second time in a row while the number of people who quit for other openings was also flat.

Japan’s national average unemployment remains well below the rates in other major economies as 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 fourth straight rise after marking a rare year-on-year drop in January. The increase in April was led by hotels, restaurants, entertainment service providers and construction firms. In recent months, employment gains have been in both regular and non-regular positions (there were sharp gains in women and non-regular jobs in April) 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 May, unchanged since the last upgrade for the category in June 2023.

Tuesday, June 30
0850 JST (2350 GMT/1950 EDT Monday, June 29) The Ministry of Economy, Trade and Industry releases preliminary May industrial output, the outlook for June, July.
Mace News median: +1.3% m/m (range: +0.8% to +2.3%) vs. April revised to +0.5% from +0.8%; -0.9% y/y (range: -1.4% to +0.1%) vs. April revised to +2.0% from +2.3%

Japan’s industrial production is expected to post its second straight rise in May, up 1.3% on the month, reflecting solid export demand for production machinery from Europe, global needs for computer chips and a pickup in shipments of vehicles to the key U.S. market. It would follow April’s downwardly revised 0.5% rebound on a 0.4% dip in March. From a year earlier, production is forecast to mark its first drop in six months, down a slight 0.9%, after a 2.0% rise in April.

Japan has increased crude oil imports from other regions to reduce its heavy reliance on the Middle East and the U.S.-Iran ceasefire agreement this month has led to the reopening of the Strait of Hormuz. But the blockade of the crucial pathway until recently 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 2.1% on the month in May, led by demand for production machinery, vehicles and computer chips, before slipping 0.4% in June when a pullback is expected for those categories that are seen pushing up May production.

In the April report, the ministry 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.

Tuesday, June 30 (postponed again from Monday, June 29)
TBA – The Cabinet Office releases the government’s monthly economic report for June. The meeting of economic ministers, which is also attended by the Bank of Japan governor (or his deputy), is usually held at around 1700 JST (0800 GMT/0400 EDT the same day) and the report is released 30 to 40 minutes later.

The government is expected to maintain its overall assessment by saying that the economy is “recovering at a moderate pace but the impact of the situation in the Middle East needs a close attention.” In its May report, the government stuck to its gradual economic recovery scenario after the January-March GDP data confirmed a steady recovery from a mild slump two quarters earlier but officials continued to warn about the drag from surging import costs and shortages of naphtha and other key materials.

Wednesday, July 1
0850 JST (2350 GMT/1950 EDT Tuesday, June 30) The Bank of Japan releases the quarterly Tankan business survey for June.
Mace News medians: large mfg sentiment +15 vs. +17 in Mar; large non-mfg +36 vs. +36 in Mar.; small mfg +4 vs. +7 in Mar.; small non-mfg +14 vs. +16 in Mar.

FY2026 large firm capex plans +10.2% y/y (+9.0% to +12.0%) vs. +3.3% in Mar.; FY2026 small firm capex plans -4.2% (-4.6% to -2.4%) vs. -8.1% in Mar.

The Bank of Japan’s quarterly Tankan business sentiment survey is widely expected to show a slight decline among large manufacturers in the June quarter, hit by elevated global energy and commodities costs amid the lingering Mideast conflict. The recent U.S.-Iran ceasefire agreement was not reflected in the June survey as most firms had responded by the middle of the month.

Naphtha shortages caused by the blockade of the Strait of Hormuz choked supply of plastics and resins that are widely used to produce vehicles, appliances, paint and food packages. High import and transportation costs as well as petrochemical supply constraints are also expected to keep confidence among large non-manufacturers flat from the previous quarter.

The Iran war that broke out in late February had only a limited impact on many sectors in the March Tankan results, which showed a slight improvement among large manufacturers, led by non-ferrous metal producers, production machine makers and the auto industry, indicating that firms had weathered the drag from stiff U.S. tariffs.

The June Tankan diffusion index for large manufacturers is projected to slip back to 15 after improving to 17 in March from 15 in December for the fourth straight quarterly gain. The index for small manufacturers is expected to fall to 4 from 7 in March, when it edged up from 6.

The index for large non-manufacturers is forecast to be unchanged at 36 in June after rising to the level in March from 34 at the end of 2025 while sentiment among small non-manufacturers is seen slipping to 14 from 16 in the prior quarter when it rose from 14 in December.

Despite uncertainty generated by the Mideast conflict, many industries plan to increase investment in factories and offices amid widespread labor shortages and strong needs to build artificial intelligence data centers.

Large firms are expected to raise their capital investment plans for fiscal 2026 that began on April 1, with combined capex forecast to rise 10.2% on the year in the June Tankan, up from a modest 3.3% increase planned in March. Smaller firms are also seen revising up their investment plans to a 4.2% drop from an 8.1% fall. They tend to gradually raise their capex plans toward the end of the fiscal year.