Economic and Price Outlook: July 2026

This article, titled “Outlook for Economic Activity and Prices (July 2026),” presents the Key Views, the current situation and central outlook for Japan’s economy and prices, risk factors for the economy and prices, and monetary policy conduct, followed by Policy Board members’ forecasts, Background Explanations, major economic, price, and financial developments, and four Boxes. The Key Views were decided at the Monetary Policy Meeting held on July 30 and 31.

Japan’s economy is currently recovering moderately, accompanied by some weak movements due to the impact of the situation in the Middle East. Corporate profits are at high levels against the backdrop of global AI-related demand and other factors, and business fixed investment is on a moderate upward trend. Private consumption is firm, supported by improving employment and income conditions; housing investment is on a declining trend, while public investment is within a flat range. Labor supply and demand remain tight, and financial conditions are accommodative.

At the center of the outlook are the deterioration in the terms of trade and downward pressure on households’ real income caused by higher crude oil prices, support from AI-related demand and wage increases, government measures to mitigate energy burdens, and accommodative financial conditions. As the effects of higher crude oil prices fade and the positive cycle from income to spending strengthens, growth is expected to accelerate moderately from fiscal 2027 onward.

Higher crude oil prices deteriorate the terms of trade and push down corporate profits and households’ real income, while pushing up the prices of energy and goods. Because of transportation costs associated with alternative sourcing, the procurement prices faced by firms may not decline as much as international market prices, and additional procurement costs are expected to spread from upstream to downstream sectors, putting upward pressure on a broad range of goods and services prices.

A weaker yen has a positive impact on the earnings of global firms and others, while pushing down households’ real income through higher import prices and negatively affecting the earnings of small and medium-sized firms. A policy rate hike is understood to lead both to increased interest income from higher deposit rates and to increased interest payment burdens on mortgages and other loans.

Expanding AI-related demand pushes up prices and exports of semiconductors, electricity and telecommunications infrastructure, machinery, and other goods, contributing to improved earnings in related industries. However, if demand does not lead to earnings growth commensurate with investment, it could generate adjustment pressure accompanied by fluctuations in asset prices.

In the central economic outlook, exports and production in fiscal 2026 are expected to remain within a flat range, supported by AI-related demand despite being affected by the situation in the Middle East. Business fixed investment will continue to increase moderately against the backdrop of the resolution of order backlogs, the government’s economic measures, and accommodative financial conditions. In terms of employment and income, tight labor supply and demand and growth in nominal wages will continue, but private consumption will remain within a flat range under the impact of price increases, while housing investment will decline moderately, reflecting higher housing prices and demographic trends. From fiscal 2027 onward, exports, production, corporate profits, and business fixed investment will increase, and private consumption will return to a moderate growth trend as the rate of price increases settles. The potential growth rate is expected to remain slightly positive.

In the central price outlook, the CPI excluding fresh food is expected to raise its rate of increase to a level clearly above 2 percent from the second half of fiscal 2026, due to higher crude oil prices, increases in semiconductor and other prices, yen depreciation, and the pass-through of wage increases to selling prices. Thereafter, the positive margin is expected to narrow toward around 2 percent as the effects of higher crude oil prices diminish. The underlying rate of inflation and medium- to long-term expected inflation are expected to be around 2 percent, broadly consistent with the price stability target, from the second half of fiscal 2026 through fiscal 2027, and to remain at about the same level thereafter. The government’s subsidies for fuel oil, measures to mitigate electricity and gas costs, and policies for free education will exert downward pressure on consumer prices in fiscal 2026.

As risk factors, it is necessary to monitor the effects of the situation in the Middle East on crude oil prices, corporate profits, households’ real income, and supply chains. AI-related demand carries both the potential to boost the global economy and the risk of adjustment if earnings do not match investment. Yen depreciation is increasingly likely to affect the prices of a broad range of items, including import prices and durable goods. In addition, fiscal and trade policies in other countries, the Chinese economy, demographic trends, labor shortages, material prices, and spillovers to the financial system are also subject to monitoring.

In conducting monetary policy, decisions are organized under the price stability target through the first perspective, which examines the central outlook, and the second perspective, which examines risks that warrant attention. Accommodative financial conditions are being maintained, and the financial system is assessed to be stable overall and to possess an appropriate degree of resilience. As the underlying rate of inflation approaches 2 percent, the policy interest rate will be raised in accordance with economic, price, and financial developments, while the timing and pace of adjustments will be considered by monitoring the situation in the Middle East, AI-related demand, foreign exchange rates, and other factors.

The ranges in the reference table for the majority of Policy Board members’ forecasts are +0.6 to +0.7 percent year on year for real GDP in fiscal 2026, +0.4 to +0.7 percent in fiscal 2027, and +0.7 to +0.8 percent in fiscal 2028. For the CPI excluding fresh food, the corresponding ranges are +2.3 to +2.7 percent, +2.8 to +3.0 percent, and +2.2 to +2.5 percent. For the CPI excluding fresh food and energy, the corresponding ranges are +2.3 to +2.6 percent, +2.5 to +2.7 percent, and +2.2 to +2.7 percent. These ranges are calculated by excluding one maximum and one minimum from the forecast figures that each Policy Board member considers most probable; they do not represent the upper and lower bounds of the outlook based on forecast errors or other factors.