July 2026 Monthly Economic Report: Gradual Recovery, Middle East Risks

The Cabinet Office summarized Japan’s economy in July 2026 as gradually recovering, although the impact of the situation in the Middle East required close monitoring. Personal consumption was recovering, capital investment was recovering, exports showed signs of recovery, and employment conditions were improving.

Meanwhile, production remained flat and housing construction weakened. Corporate earnings improved, but corporate outlook assessments were somewhat cautious, while consumer prices rose gradually. The global economy was also recovering despite lingering weakness in some regions, but uncertainty, including that surrounding the situation in the Middle East, continued.

Looking ahead, improvement in employment and income conditions and various policies are expected to support a gradual recovery. However, it remains necessary to continue assessing the effects of the situation in the Middle East and financial and capital market volatility on domestic and overseas economies.

For households, gradual growth in real total employee income will support consumption, while trends in price increases and consumer sentiment will influence purchasing power and the sustainability of spending. Fluctuations in fuel and energy prices may also affect living costs.

For companies, improved earnings and labor shortages may create room for capital investment and labor-saving measures. However, investment plans and business condition assessments are likely to remain cautious because of concerns about overseas demand, procurement of raw materials and fuel, and financial market volatility.

In policy management, the challenge is to maintain the domestic recovery while responding promptly to supply constraints and market fluctuations originating overseas. For regional economies, public investment is expected to remain firm and support demand.

On the demand side, real private final consumption expenditure increased 0.3% from the previous quarter in the January–March 2026 quarter, and retail sales increased 1.7% from the previous month in May. Capital investment decreased 2.0% from the previous quarter in the January–March 2026 quarter, but machinery orders were recovering, and an increase is expected for the fiscal 2026 plan. Public investment received an additional approximately 2.5 trillion yen under the fiscal 2025 supplementary budget, bringing it to an increase of 2.3% from the previous fiscal year.

Regarding corporate earnings, ordinary profit increased 14.6% year on year in the January–March 2026 quarter, with manufacturing up 42.9% and nonmanufacturing up 1.4%. The number of bankruptcies increased from 780 cases in May to 1,021 cases in June, while total liabilities rose from 121.1 billion yen to 133.1 billion yen. The employment conditions diffusion index was -37 for all industries, indicating a high level of perceived labor shortages.

Prices rose, with domestic corporate goods prices increasing 0.4% from the previous month in June, while consumer prices excluding fresh food and energy increased 1.6% year on year. In financial markets, the unsecured overnight call rate remained around 0.97%, long-term interest rates moved from around 2.6% to around 2.8%, and the average outstanding balance of loans by commercial banks increased 6.3% year on year.

Based on Basic Policy 2026, approved by the Cabinet on July 21, the government seeks to achieve a strong economy and fiscal sustainability together under responsible and proactive fiscal management. In response to the situation in the Middle East, it is advancing measures to mitigate sharp fluctuations in fuel oil prices, reduce the burden of electricity and city-gas charges, secure alternative supplies, release stockpiles when necessary, ensure stable supplies of critical goods, and execute the supplementary budget flexibly. The government and the Bank of Japan are coordinating to achieve the price stability target while confirming a virtuous cycle between wages and prices.

Overseas, U.S. GDP increased 0.5% from the previous quarter in the January–March 2026 quarter, China’s GDP increased 4.3% year on year in the April–June 2026 quarter, Taiwan’s GDP increased 14.5% in the January–March 2026 quarter, and India’s GDP increased 7.8% in the same quarter. The U.S. policy rate was left unchanged at 3.50% to 3.75%, the European Central Bank’s deposit facility rate at 2.25%, and the Bank of England’s policy rate at 3.75%.